“Mortgage” is a word coined from an old English word used in French law, “death pledge.” It is a type of loan that “dies” when it is either fully repaid or if the borrower defaults.

A mortgage - Title Image

What Is a Mortgage?

A mortgage is a loan used to purchase or maintain real estate. The borrower pays the lender over time in regular payments that cover the principal and interest. Mortgages help individuals and businesses buy real estate without paying the entire purchase price upfront. A Borrower is to repay the loan and interest over a given number of years, after which they own the property free and clear. 

In order to secure a mortgage, a borrower must apply through a lender of their choice and have met the requirements of the lender, some of which are:

  • A required down payment
  • A good credit score 
  • A series of paper processes

Having completed a thorough process, the borrower, if found worthy, is then granted the loan to perform the intended purpose of applying for the mortgage.

How mortgages work

Most mortgages are paid in a specific amount over a period of time, with regular payments staying the same but with different proportions of principal vs. interest. Most mortgages are usually paid over a period of fifteen to thirty years, and in the event that the borrower refuses to make payments as agreed, the lender can foreclose on the property acquired. In a foreclosure, the lender may evict residents, sell the property, and use the sale money to pay off the mortgage debt. 

Mortgage: How mortgages work

When a buyer is applying for a mortgage, some of the required documents of interest are bank statements, tax returns, and employment documentation, A credit check is also done in order to validate the buyer’s ability to repay the loan. Following a document review by the lender, a loan amount is determined along with an associated interest rate. Buyers can apply for a mortgage before deciding on a property to buy through a process called pre-approval. This can provide you with an advantage over competing purchasers by demonstrating to sellers your seriousness and readiness. It also helps prevent delays and unpleasant shocks during the financing process.

What is a pre-approval? 

Pre-approval is a conditional commitment from a lender to lend you a certain amount of money for a home purchase based on the accredited paperwork. It usually lasts 60 to 90 days, depending on the lender and market conditions, and is not a guarantee but a strong indication of your borrowing power and eligibility.

The process of preapproval begins with an application to a lender or a mortgage broker, where you will need to provide some documents that prove your income, assets, credit, and debt. The lender will ascertain the validity of your information, check your credit score, and then give you a pre-approval letter, which will contain the loan amount, interest rate, and the conditions that surround the offer. Comparing different lenders and their preapproval results will help you make the best decision.

Why do you need preapproval? 

  • It provides an advantage by narrowing down the search for a property, which provides the buyer with a realistic budget and pricing range.
  • It may increase your chance of getting approved by sellers, who favour buyers with preapproval over those who do not. 
  • The closing process can be fast-tracked because paperwork and verification have already been completed. 

What to do with a preapproval

After you have successfully gotten pre-approval for a mortgage, you can confidently start reaching out to sellers. With your pre-approval letter as a bargaining tool, your real estate agent can begin to search for a property that meets your taste and budget. 

A pre-approval does not close the deal and is liable to change depending on factors like income, inspection, debt, or market conditions. Major financial changes, such as changing jobs, could affect your pre-approval status. Once you find the home of your dreams and have an accepted offer, submit your final loan application and documents. However, Stay in touch with your lender and update them on any changes that might affect the approval. 

Mistakes to avoid during pre-approval

Pre-approval for a mortgage can be a rewarding process. Still, it’s crucial to avoid potential mistakes like getting pre-approved for more or less than needed, only getting pre-approved by one lender, assuming pre-approval is a guarantee, changing financial situations, or disclosing relevant information. Avoiding these mistakes will ensure a successful transaction.

What is the reason for securing a mortgage?

A mortgage is very helpful because the price of acquiring a home is always beyond the realistic earning capacity of most households. This allows individuals, groups, and families to acquire a property with a relatively small initial payment of about twenty percent of the purchasing cost. If the buyer defaults, the property’s value can cover the remaining percentage provided by the lender or mortgage broker.

Types of Mortgages

The Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the United States Department of Agriculture (USDA) are three examples of government agencies that offer potential buyers access to mortgages through various programs that are tailored to meet the needs of particular groups of people.

Below are a few types of mortgage options:

  • Fixed-rate mortgages: Also known as traditional mortgages, a fixed-rate mortgage’s interest rate is predetermined and does not vary over the loan period.

This mortgage plan shields the borrower against rising interest rates, and the predictability of payments simplifies budgeting and financial planning. Qualifying for a fixed-rate mortgage is easier for lower-risk borrowers than for higher-risk borrowers. 

  • Adjustable-rate mortgages (ARMs): An adjustable-rate mortgage (ARM) is a house loan with regular interest rate changes based on benchmark performance. ARMs, also known as variable rate or floating mortgages, have ceilings limiting annual interest rates and payments. ARMs are suitable for individuals who plan to maintain the loan for a limited period and can tolerate future interest rate increases.
  • Interest-only mortgages: An interest-only mortgage requires instalments covering only the interest part of the mortgage’s balance for a certain period of time, as opposed to paying both the principal and interest. These payments with only interest might be needed for a fixed period of time, offered as an alternate option, or prolonged throughout the whole loan term, requiring the return of the principal balance at the loan’s completion.
  • Reverse mortgages: They are designed for homeowners who have already clocked 62 years or more and are designed to convert part of their home’s equity into cash. These mortgages can be borrowed against the value of the property and receive the money as a lump sum, fixed monthly payment, or line of credit. The entire loan balance becomes due when the borrower dies, moves away permanently, or sells the home.

How to compare Mortgages

In the past, mortgages were mostly available through banks, credit unions, and loan organisations. However, in today’s expanding market for mortgages, we now have nonbank lenders such as Better, SoFi, and Rocket Mortgage. 

If you want to gain insight into how mortgage rates work, try out an online mortgage calculator to estimate your monthly payments. This estimation is based on the type of mortgage, the percentage of the down payments, and the interest rate. It can also check the cost of the property you can afford. 

Can I get more than one mortgage?

It is only normal for lenders to give you an initial mortgage before you can secure another mortgage. The additional loan is usually called a home equity loan. Technically, there is no restriction on the number of sub-mortgages you can get as long as your equity, credit score, and debt-to-income ratio are intact.