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How does a mortgage work?

In legal terms, a mortgage is "the pledging of property to a creditor as security for the payment of a debt". In plain English, a mortgage is a loan. For many people, it's the biggest loan they will ever borrow. With a regular loan, there's no explicit collateral. The lender looks at your credit history, your income and your savings, and determines if you're a good risk. With a mortgage, the collateral for the loan is the house itself. If you don't pay back the loan (along with all of the fees and interest that are included with it), then the lender can take your house.

A mortgage works by using the property as collateral for the loan, allowing the lender to take possession of the property if the borrowed amount isn’t repaid or any other terms of the agreement are broken. Here’s an overview of what the mortgage process entails.

1. Decide if you want to get pre-approved first: While a pre-approval is optional and not required in order to be approved for a mortgage, it can help you determine the loan amount you may qualify to borrow and also show sellers that you’re a serious buyer. According to Zillow’s Consumer Housing Trends Report 2022, 85% of sellers say that they prefer to accept an offer from a buyer that is pre-approved.

2. Apply for a mortgage: When you apply for a mortgage, the lender will likely start by using an automated underwriting system (AUS) to look at your credit score, income, assets and debt to make sure you’re likely to repay the loan. Before officially approving your loan, the lender’s underwriting department may require further information about the property you’re purchasing like its appraised value.

3. Receive a loan approval: If your mortgage is approved, you’ll receive a written commitment from the lender, documenting the loan terms and your mortgage agreement. At this time, you can review your expected monthly mortgage costs and any conditions you must meet before closing.

4. Complete the closing process: When taking out a mortgage, you’ll need to sign a promissory note and security instrument at closing. These documents show that you acknowledge a debt exists and are a promise to repay the borrowed amount with interest by a set period of time, usually within 15 to 30 years of the loan start date.

5. Make on-time payments: You’ll need to make monthly mortgage payments until the loan is paid in full. While you technically own the home during this time, having a mortgage means your lender also has an interest in the property. If you fail to keep up with your payments, the mortgage gives the lender a right to take possession of the home and sell it to recover the debt owed through a process called foreclosure.

6. Start building equity: As you get further into paying off your mortgage, you build equity in your home — meaning you own a little bit more of the home and the lender owns less. When the mortgage is paid in full, the lender no longer has a security interest in your property — giving you full ownership of the home.

How long is a mortgage term?

A mortgage term is the length of time you have to repay the loan amount borrowed with interest. Most mortgage terms are either 30 or 15 years. However, mortgage terms may be as short as 10 years and as long as 50 years. Longer term loans generally have a smaller mortgage payment than shorter term loans, but you typically pay more in interest over the longer term.

What is interest on a mortgage?

Lenders charge interest on the money you borrow. This interest is represented by a percentage of your loan amount like 6.25% of $300,000. Your interest rate may be higher or lower than this, depending on your credit history and worldly factors outside of your control like the health of the housing market and the economy. While your lender decides the interest rate you receive on a mortgage, rates are ultimately influenced by the Federal Reserve Board who determines the rate at which banks can borrow money from other banks. Depending on the type of mortgage you choose, your rate may be fixed or adjustable.

Дата: 21-10-2019

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