What is a Mortgage and how it Works?

Buying a home becomes easy with a mortgage, which is nothing but a kind of loan secured by the real estate you are going to purchase. Since the loan is backed by collateral, you won’t find much difficulty in obtaining quick funds at attractive rates.

Lenders are willing to offer instant mortgage loans at competitive interest rates provided you have maintained a good credit score and have regular income to pay back the loan amount. Failing to make payments on time may lead to foreclosure, which is the process to take full ownership of your home by your lender.

The Mortgage Process

The process of a mortgage begins as soon as you feel the need of buying your own home instead of renting an apartment or villa. It is generally not possible to pay down the entire cost of a residential unit from your own sources.

You will eventually need the help of a mortgage provider to pay for the cost of the housing unit you set to buy. Most banks and lenders allow you to pre qualify for a loan before you can find the home of your dream.

While applying at too many lenders might put a dent in your credit report, it is generally taken as a good idea to apply at least two lenders offering the best rates of interest and payment terms. Comparison shopping is a smart way to get the best mortgage deal. Don’t hesitate to use tools, such as payment calculator, rate calculator and amortization calculator to get in-depth analysis of the mortgages on offer.

The Mortgage Components

After application, all you can do is to wait for the approval. Once you are approved, you are all set to begin steps to realize your dream of homeownership.

It is important to note that the finance is available for only 80 percent of the cost of the home. You must put down the remaining 20 percent from your own resources. Lenders might ask you to pay private mortgage insurance (PMI) if your down payment is less than 20 percent.

The final step of a mortgage is referred to as the closing. Both the parties (lender and borrower) sit together to work out the deal and give it the final shape. The lender provides the principal amount of the loan and you put the amount of down payment at the closing table. Moreover, you are also required to pay for the fees and other expenses known as closing cost.

The Mortgage Payments

Depending upon the type of mortgages you have selected your payments might be fixed or floating. In either case, you need to pay your mortgage every month in order to get relieved from the debt burden. A typical payment consists of four parts – Principal, Interest, Taxes and Insurance – commonly referred to as PITI.

The process of paying down your loan over a period of 15 or 30 years is known as amortization. In case of a fixed-rate mortgage, the amortization schedule is heavily tilted towards interest in the initial years of the loan term.

It is often difficult for the borrowers to decide between a fixed-rate mortgage and an adjustable-rate loan option. While the former offers you immunity from the changeable behavior of interest rates, the latter can offer you a much lower interest rate in the initial few years.

If you want to keep your home and use the equity in future, the first kind of mortgage loan is appropriate for you. However, if you intend to sell your home after few years, an ARM can be a better choice.

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