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A mortgage is a legal agreement between a home buyer and a financial institution in which the financial institution provides a loan to the borrower to cover the majority of the cost of purchasing a home. Consequently, a mortgage refinance loan is another form of mortgage that allows the homeowner to borrow money, at a lower interest rate, to reduce the monthly payment on their mortgage loan.
Borrowers who get a home loan pay interest on the loan (the amount of money the lender earns on the loan), usually over a period of 15 or 30 years. Failure to pay a mortgage loan can result in a home foreclosure, in which the bank or financial lender withdraws the loan and claims ownership of the property in question.
What goes into a mortgage?
Primarily, a mortgage consists of four key elements: principal, interest, taxes, and insurance.
Major
This is the total amount of cash that the mortgage lender agrees to provide to a homeowner to purchase a home. For example, if he takes out a $250,000 home loan, he will have to pay the entire $250,000, plus interest.
Interest
This is the amount of money, expressed as a percentage linked to Federal Reserve and financial institution lending rates, that a borrower agrees to pay to obtain a mortgage loan.
Taxes
This is the amount of money, expressed as property taxes, that you will pay to own a home in your community. Property taxes are collected as a percentage of the perceived value of your home.
mortgage insurance
This is the amount of money you will pay in a home loan to cover your home and property. Mortgage insurance typically comes into play if a borrower makes a down payment of less than 20% of the home’s sales price. That helps the lender reduce the risk of making a loan that the borrower can’t repay.
How to apply for a home mortgage
When it comes to completing your home loan application, the process doesn’t have to be overwhelming.
Follow these steps to make sure your home loan paperwork is in order and you’re more likely to get approved:
Step 1: Be prepared with documentation
A good homebuyer is a prepared homebuyer. As you prepare to complete your home loan application, make sure your financial situation is in order. That means checking your credit report for errors or other surprises and having a decent down payment. Just as important, get the necessary financial documents in order. Make sure you have the following:
- A copy of any applicable purchase and sale agreement.
- Any current mortgage information, including monthly payments, taxes, and an estimate of housing expenses. If you have lived there for less than two years, be prepared to include previous addresses dating back seven years.
- A two-year employment history and verification of all sources of income. Typically, your latest pay stubs and copies of your federal tax returns for the past two years will do the job (the latter is required if you’re self-employed).
- Information about your checking, savings and credit card accounts. Two months of bank statements and investment account information are acceptable. On the debt front, lenders generally don’t like to see more than 20% of your estimated loan amount tied up in debt. Expect to include the outstanding balance on each of your debts.
- The Social Security number of you and your spouse, if you are buying the house together.
- The number and ages of your dependents.
- Information on divorce decrees. Not all lenders require you to provide information about the divorce; don’t be surprised when they do.
Step 2 – Learn about your mortgage options
Mainly, home mortgages come in two varieties: fixed-rate mortgages and variable-rate mortgages.
Fixed Rate Mortgages
These mortgages allow you to have the same interest rate for the entire term of the loan, which usually ranges from 15 to 30 years. Learn about the risks and benefits of a fixed rate home loan. If interest rates drop over time, you’ll have to pay the higher interest rate you’ve agreed to with your lender (although refinancing to a lower-rate loan is an option). On the other hand, if interest rates rise, your fixed interest rate agreement with your mortgage lender protects you from rising interest rates.
Variable Rate Mortgages
These mortgages come with interest rates that fluctuate over time, based on Federal Reserve rate decisions, bank lending terms, and the state of the US and even world economies. As economic decisions rise and fall, interest rates rise and fall accordingly. A note of risk on adjustable-rate mortgages: These mortgages often offer lower interest rates up front, with the strong possibility that those mortgage rates will increase after a pre-agreed period of time (usually after five to seven years). ).
Step 2 – Schedule a Home Loan Application Interview
By now you have selected a mortgage lender that you are comfortable with and that offers terms and rates that meet your home buying needs.
Help your lender help you by scheduling a formal interview, either face-to-face, online, or over the phone. That speeds up and simplifies the loan application process. Your loan officer will use the meeting to explain the types of mortgages the lender offers, interest rate information, home purchase fees, and criteria needed to qualify for your mortgage loan. This critical information is not only what you need to know, but also gives you a better framework for completing your loan application.
In fact, in many cases, the loan officer will walk you through the loan application during the meeting. He may have to ask, and it is recommended that he ask, but professional help is there when he needs it.
Step 3: Complete your home loan application
Be thorough, careful and diligent in handling your home loan application. Double-check for errors and typos, and especially make sure that any financial data you include is accurate and up-to-date. If a mortgage lender finds an error or believes the information on your loan application is inaccurate, that’s more than enough for the lender to reject your mortgage application.
Tips for completing your mortgage application
Use these tips to increase the chances that your home loan applications will be completed the first time:
Complete an advance mortgage application
Are you thinking about buying a house but you are not ready to do it? Even if you plan to wait about six months before buying, fill out a home mortgage application anyway—the exercise will get you fully prepared for the application process and also give you a good idea of what you’ll need to complete your loan. application form when the real deal arrives.
Know what you can afford to pay
A big step is to design a mortgage that works for you, rather than the other way around. The key here is to identify what monthly mortgage payment you can afford without losing sleep at night. Expect that figure to be around 15% to 30% of your monthly income (depending on your local tax rates and the amount of your homeowner’s insurance). You’ll also want to review your credit report ahead of time to make sure you’re a good credit risk.
Know the interest rates
In general, your mortgage will be paid off in 15 or 30 years. When it comes to interest rates, the shorter the time you will need to pay off the mortgage, the more favorable your interest rate will be. And the lower your interest rate, the lower your monthly mortgage payment. Consequently, your first job when shopping for a mortgage lender is to compare interest rates, along with penalties and points.
Don’t plan on missing a loan payment
This may sound obvious, but if you default on your monthly mortgage loans, your lender may initially charge onerous late fees and penalties that add to your mortgage bill. In the worst case, continued non-payment can lead to your lender repossessing your home.
Make no mistake, your home loan is one of the most important—and one of the most complicated—personal financial deals you’ll ever make in your life.
That is why it is important to study and prepare to get the best offer on your loan.
