Ask The Loan Man

Mortgage Basics

Simply put, a mortgage is a loan secured by real property and paid in installments over a set period of time.

The mortgage secures your promise that the money borrowed for your home will be repaid.

According to Wikipedia:

A mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.

Components of a Mortgage:

1. Mortgage Approval:

Qualifying for a mortgage requires meeting a pre-determined set of guidelines established by a lender, which may include credit history, income, employment and assets.

In addition to personal qualifying factors, a property must also meet certain standards set by lenders before a borrower can obtain a mortgage loan secured by real estate.

2. Mortgage Payments

On a traditional 30 or 15 years fixed rate mortgage program that involves principal and interest, each payment made is divided into two parts (we’re not including taxes or homeowners insurance as part of this discussion):

The first part of the mortgage payment, which is commonly referred to as principal, goes to paying down the initial amount borrowed.

The second part is the interest paid for the money borrowed to purchase the property.

The amount paid in interest decreases each month, as the amount paid towards the principal balance increases. This apportioning is referred to as amortization.

Other types of mortgage payments available can include options for paying interest only or a teaser rate.

Either way, it is extremely important to have a solid understanding of the full payment and terms before moving forward with a particular option.

3. Mortgage Programs

Mortgage Programs come in many different types of flavors and colors depending on the down payment and/or monthly budget a borrower has been approved for.

There are also federally insured mortgages, such as FHA or VA loans, which have more flexible qualifying guidelines.

4. Closing Costs / Fees

The actual cost of obtaining a mortgage mainly depends on whether or not the borrower is paying points for a lower mortgage rate.  In some cases, there are also other loan processing and underwriting fees associated with the work involved in the transaction.

Fortunately, there are several consumer protection policies implemented by the government to help borrowers understand their options during the initial mortgage pre-qualification process. However, please keep in mind that there may be other closing costs not associated with a mortgage or real estate transaction to be aware of. Appraisal, pre-paid property taxes, insurance and interest, HOA dues and inspections are a few additional out-of-pocket expenses you should budget for.

5.  Mortgage Rates

While mortgage interest rates may change several times a day, there are a few market factors you can pay attention to which may impact your final payment.

Whether you’re shopping for the best rate, or trying to determine the difference between the Note Rate and APR, it definitely helps to understand what questions to ask a mortgage lender about your specific loan scenario.