Many of us have never heard mortgages explained by a teacher or expert during our high school or even college education.
If you’ve never had a mortgage or are looking to buy a home for the first time, you may be curious how it works.
In today’s post, we’re going to run through the basics of a mortgage.
What is a Mortgage?
Simply put, a mortgage is a loan from a lender or a bank to finance buying a house. Upon getting the loan, you sign a contract agreeing to pay back the loan amount in full, plus interest. As part of the contract, your home is the collateral for your loan. This means that if you break with the terms laid out in your mortgage loan, the bank has the right to foreclose on, or take ownership of your property, and sell it. The most common mortgages are set for a 15- or 30-year period and have a fixed interest rate, which will be detailed in your contract.
Why Get a Mortgage?
The main reason the majority of homeowners have a mortgage is affordability. The median sales price for homes in Salt Lake County in 2020 is $369,500, an 8.7% increase over 2019 (source). Most people do not have anywhere close to that amount of savings and aren’t able to pay cash for a house. First-time homebuyers also don’t have the benefit of home equity to add to their assets. Mortgage loans, then, make it possible to buy a house without having to save for years and years.
Qualifying for Mortgages Explained
There are four different types of government-backed loans: conventional, FHA, USDA, and VA. Each of these will have their own set of terms and qualification requirements, but the steps are similar. You’ll need to meet a minimum credit score, provide proof of income through W-2s, pay stubs, and tax records, and also show your employment history and savings. Savings is also important when it comes to your down payment. Each loan type has a different minimum requirement, such as 3% for a conventional loan. The down payment will have a huge effect on the actual monthly payment amounts since it influences the total loan amount and the need for private mortgage insurance (PMI).
Breaking Down the Monthly Mortgage Payment
When you pay your monthly mortgage, you are actually paying towards several categories: principle, interest, taxes, and insurance. This is often referred to as PITI in the lending community. The principle is the actual loan amount, while interest refers to the interest you’re paying on the loan. In the beginning, most of your payment will actually go towards the interest rather than the principal amount. Your lender will provide you with an amortization schedule, which details how the principle and interest are balanced in each payment over the course of the loan. You may opt to have an escrow account with your lender, from which property taxes and homeowner’s insurance are paid.
Bob Buys Houses Can Help
It may be confusing the first time you have mortgages explained to you, but rest assured there are people to help you every step of the way. If you’ve already purchased a home but need to sell it quickly, you may be looking for a simple way to avoid foreclosure. At Bob Buys Houses, we can help you avoid foreclosure on your Salt Lake City, Utah, home and get out of your mortgage. Connect with us to find out how we can help you!