Mortgage
Mortgage is a loan from a bank that gives an individual an opportunity to purchase residential or non-residential property. A mortgage is usually perceived as a loan for the purchase of a house or an apartment. In this case, the collateral is an apartment (house) purchased with money received from the bank. The borrower undertakes to repay the loan and interests within a certain period of time.
A borrower has to fill out a housing loan application form on the website of the selected bank, and apply with a package of documents to the credit institution. Before that it’s necessary to evaluate financial capabilities. Mortgage underwriting includes checking credit history of the client, property and other procedures. The number of types of mortgages is increasing and they are usually structured based on the needs of the clients.
Mortgage explained
Individuals and companies can get a mortgage and become an owner of the real estate when there is no opportunity to buy it right away. Monthly, during the entire mortgage repayment period, the borrower pays back the debt and accrued interest. Foreclosure on the debtor's property is the main measure of punishment for non-payment of the mortgage.
For instance, a borrower pledges the property to the lender and he can have a claim on it if the borrower fails to fulfill financial obligations. It gives the lender the right to evict the residents, put the real estate up for sale and pay back the mortgage debt.
How to get a Mortgage
The first stage in the mortgage process is a comparison of offers from different banks. If a borrower approves mortgage conditions, he can fill out an application and provide documentation about the finances to demonstrate that he has the ability to repay the debt. The package of documents required for a mortgage may include bank and investment statements, recent tax returns, an employment verification letter, etc. The lender can also use credit scoring to evaluate the borrower's creditworthiness.
The lender, based on the information provided, decides to issue a mortgage of up to a certain amount and at a certain interest rate. Many people first choose real estate and only then apply for a mortgage. There is another way: apply for a mortgage while still choosing an apartment or a house. This process is called “pre-approval”.
After the approval of the application, a buyer and a seller negotiate the terms of the deal. Then they meet at the final phase, where the borrower pays the down payment. The next step is the registration of real estate in the name of the mortgage borrower. Within a few days after receiving the documents confirming ownership, the bank will transfer funds to the borrower's account or issue them in cash.
Main types of Mortgages
Types of mortgages are classified according to various characteristics, depending on the property, the method of calculating monthly payments, the term of the mortgage loan, etc. The average mortgage loan term issued is 15 or 30 years, but it can be even longer. By stretching out the loan term, people are trying to reduce their debt burden, but this often leads to a substantial overpayment.
There are different home loans presented in the U.S. For example, a Federal Housing Administration (FHA) loan, which is a solution to the problem for citizens who cannot get a regular loan. The FHA loan is a mortgage loan secured by the Federal Housing Administration with a low down payment, allowing them to purchase their first home.
Below are several types of mortgage loan options that are common among borrowers.
Fixed-rate Mortgages. Fixed–rate mortgage is the most common banking product. The fixed interest rate on a mortgage loan is the rate determined once at the conclusion of the contract. It applies for the entire duration of the contract. Such a rate is not subject to revision.
Adjustable-rate Mortgages (ARM). An adjustable-rate is an interest rate that can change throughout the entire loan period. This is a type of mortgage in which the interest rate on the loan depends on prevailing interest rates. The initial interest rate on the loan issued is generally a below-market rate and it may influence the availability of the mortgage in the short term. However, it may be less affordable in the future if the interest rate increases significantly. The limits of change in the rate are usually established by the bank within the loan agreement.
Interest-only loans. Interest-only mortgage is less popular than other types as it is characterized by the complex repayment schedules. When a borrower gets an interest-only loan, he pays interest only the first several years of the loan making monthly payments lower. It is known that many borrowers encountered problems connected with such “complex” loans during the housing bubble in the 2000s.
Reverse Mortgages. Reverse mortgage is a type of loan secured by real estate. The borrowers can be senior citizens – homeowners. Funds are transferred to the bank account in equal shares, as a lump sum or line of credit during the entire period of the agreement. At the same time, the rentier retains the possibility of living in a house or an apartment and remains their owner until the end of his life. Homeowners receive money and continue to live in their house or apartment. Debt obligations – funds received by an elderly person and the interest accrued on them – are repaid by selling the property only after the death of the borrower or a permanent move.
Average Mortgage rates for 2022
The interest rate on a mortgage loan is influenced by the type of mortgage, the term of the loan, any discount points paid, and interest rates at the time. Each bank has its own method of calculating interest rates for credit products, so all mortgage proposals and credit institutions should be considered.
Here are average interest rates of February 2022, according to the Federal Home Loan Mortgage Corp.:
- 30-year fixed-rate mortgage: 3.92% (0.8 point);
- 15-year fixed-rate mortgage: 3.15% (0.8 point);
- 5/1 adjustable-rate mortgage: 2.98% (0.8 point).
How to compare Mortgage terms
Nowadays not only banks, savings, loan associations and credit unions, but also nonbank financial institutions can act as lenders.
It is convenient to use the mortgage calculators that are available on the websites of many banks. Such services show estimated monthly payments depending on the type of mortgage, interest rate and other parameters. Mortgage calculator is a great opportunity to precalculate what kind of property a borrower can afford.
It is important to mention that the lender or mortgage servicer can also open an escrow account for the borrower to cover local property taxes, insurance bills, and other expenses.
There is also private mortgage insurance (PMI) that should be taken into consideration. Private Mortgage insurance (PMI) is a special type of insurance provided to protect the lender against potential losses if the borrower has not fulfilled his obligations. Most lenders require PMI when a borrower makes a down payment of less than 20% of the purchase price of property.
