Buying a home is a significant milestone; for most of us, it involves getting a mortgage. But what exactly is a mortgage, and how does it work? Let’s break it down.
What is a Mortgage?
At its core, a mortgage is a home loan. When you’re ready to purchase a home and don’t have the full amount of cash to cover the purchase price of a home, a mortgage lender steps in. They essentially buy the home on your behalf in one lump sum upfront. In return, you agree to pay back that loan to the lender, typically through monthly payments, over a set period of time.
Most mortgages are structured for 15 or 30 years, giving you time to repay the loan gradually.
Where Can You Find Mortgage Lenders?
When it comes to finding a lender, you have a few options. Most people will go to one of the three sources for a mortgage:
- Banks: local, regional, and national banks, like Trust or Bank of America, are a common source for mortgages, offering a wide range of loan products with different terms.
- Credit Unions: These member-owned financial institutions often provide competitive rates and personalized service at or below other institutions.
- Online Lenders: The rise of online platforms has made it easier than ever to compare rates and apply for mortgages with institutions nationwide, as long as they are licensed to offer mortgages in your state.
Types of Mortgages
Understanding the different types of mortgages available is crucial, as each is different and comes with different terms, payments, and expectations.
Fixed-Rate Mortgages
With a fixed-rate mortgage, your interest rate remains constant for the entire duration of the loan, and the US government backs this loan, making it easier to get than other types. The consistent rate provides predictability in your monthly payments, as they won’t change when interest rates change. You should know that it doesn’t mean your mortgage will never change. Often (though not always), things like homeowners insurance, mortgage insurance, taxes, and fees are included in your mortgage, and these can change from year to year.
Adjustable-Rate Mortgages (ARMs)
Unlike fixed-rate mortgages, the interest rate on an adjustable-rate mortgage changes after an initial fixed period. ARMs (as they are called) typically start with a lower interest rate than fixed-rate mortgages, which can be appealing to some buyers. However, it’s important to be aware that your payments could increase or decrease once the adjustable period begins. These payments will be dependent on the fluctuations of interest rates.
Conventional Loans
Conventional loans are not insured or guaranteed by the federal government. This often means they come with stricter requirements, particularly regarding credit scores, than government-backed loans. They can come either in fixed or variable varieties.
FHA Loans
Backed by the Federal Housing Administration (FHA), FHA loans are designed to make homeownership more accessible, especially for individuals with less-than-perfect credit or lower income. They often feature lower interest rates and more flexible down payment requirements than conventional loans.
Choosing the right mortgage depends on your financial situation, credit history, and long-term goals. By understanding these fundamental aspects of mortgages, you’ll be better equipped to make an informed decision on your path to homeownership.
