A mortgage is a type of loan that specifically helps someone to buy a home. The best way to buy a home is to pay cash, but most people don’t have enough money saved to make a 100% down payment. Enter, the mortgage. A mortgage, or a mortgage loan, is used to finance the purchase of a home if you can’t pay the full cost of a home out of pocket, upfront. In other words, after you make the best possible down payment you can make, your mortgage “fills the gap” between that payment and the remainder of the home’s purchase price.
To get a mortgage, a lender and buyer enter into a legally binding agreement whereby that lender provides a precise amount of money to the borrower for the express purpose of purchasing a home. As the borrower, you agree to pay back the mortgage loan (with interest) to the lender over a set period of time called the mortgage term, which refers to the number of years you have to repay your loan. (A longer term usually means you will have lower monthly payments; while a shorter term typically means you will have larger monthly payments, but savings when it comes to the interest). You don’t fully own the home until the mortgage is paid off.
To clarify, a lender is a financial institution that loans money to someone who needs to finance a home purchase; and the borrower is the person seeking to purchase the home. (The main types of lenders are mortgage brokers, direct lenders like banks or credit unions, and secondary market lenders such as Fannie Mae and Freddie Mac.) Additionally, mortgages are “secured” loans, which means that borrowers must promise collateral—the home itself—to the lender so that if borrowers discontinue payments on mortgages, the lender can foreclose on your home. (A foreclosure allows the lender to evict the tenants of the property—whether that tenant is the homeowner or someone renting the house—so it can be sold to clear the mortgage debt.)
Your mortgage payment is the amount you are required to remit each month toward your loan. Each monthly payment is comprised of four major components: principal, interest, taxes, and insurance. The loan principal is the balance or amount of money you have left to pay on the loan after each monthly payment. The interest you pay each month is based on your interest rate and loan principal; it goes directly to your mortgage provider and as your loan matures, it decreases—that is, you pay less interest as your principal decreases. Taxes are collected by your lender and usually kept in something called an escrow account until property taxes are due; the taxes are paid from that account on your behalf. Homeowner’s insurance covers the cost of your home in case some disaster occurs (e.g., tornado, fire, etc.), causing damage to the property. (Most lenders actually require homeowner’s insurance.)
If you need help navigating the real estate market as you search for a new home, WEICHERT, REALTORS® – The Place of Houses is the experienced team to call. The Corpus Christi-based company is comprised of several professional real estate agents who are committed to providing outstanding service to their clients. Contact WEICHERT, REALTORS® – The Place of Houses so the expert real estate team can assist you in finding and financing your new home.