What is a Mortgage?
There are many different definitions for a mortgage. But to put is in simple terms, a mortgage is a loan that is secured by a property or house and paid in installments over a set period of time. The mortgage is your promise to the lender that the money borrowed will be repaid. What are the Components of a Mortgage?
1. Qualification Depending on the terminology used by your mortgage professional, this aspect of the mortgage might be called qualification, pre-qualification, or approval. No matter who you speak with, the qualification process starts with your lender making sure that you meet a set of guidelines that have been established by the lender; local and federal government; as well as mortgage agencies such as Fannie Mae, Freddie Mac, and FHA. These guidelines include verifying employment and income, credit, assets, down payment, property type and occupancy.
2. Payment Options Understanding the payment options is one of the most important parts when deciding which mortgage program to use. A typical mortgage payment will include principal, interest, taxes, and insurance (referred to as PITI). Other factors to look at when reviewing payment options are amortization, term, and mortgage insurance. There are also other types of payment options that might be available such as teaser rates, rate buy-downs, and interest only loans. Make sure to get all of your payment questions answered by a qualified loan originator before deciding which program will best suit your needs.
3. Mortgage Loan Programs The loan programs that are available to an individual borrower will vary depending on the qualification process. When speaking with your loan originator, make sure to inquire about all loan programs that you could possibly qualify for. These would include Conventional, FHA, VA, USDA Rural Housing, and First Time Homebuyer Programs. Within each loan program, there will more than likely be options for a fixed rate or adjustable rate mortgage (ARM).
4. Rates There are many factors that go into determining the interest rate for your new loan. Most of these factors are tied to the type of loan program, property type, occupancy, and credit. When shopping for an interest rate, keep in mind that rates can change daily. There are many market factors that might be able to help you keep an eye on the movement of interest rates.
Whether you’re shopping for the best rate, or trying to determine the difference between the Note Rate and APR, it definitely helps to understand what questions to ask your loan originator about your specific loan options.
5. Closing Costs and Pre-Paid Items Many people believe that the costs associated with closing on a new mortgage loan are derived directly from the lender. But in fact the costs come from everyone who is involved with the mortgage process.
The lender costs are usually defined as origination, underwriting, and processing fees. On a Good Faith Estimate, all of these fees will be lumped together in box “1. Our origination charge.” An additional lender fee that could be charged is a discount fee. This is used to buy the interest rate down if you choose to do so, and would show up in box “2. Your credit or charge (points) for the specific interest rate chosen.” If you choose to set up an escrow account for the payment of your property taxes and homeowner’s insurance, the lender would also collect money at closing to ensure that those escrow accounts have enough available funds once the payments are due. All other fees collected at closing are often referred to as third party fees. This is because the entities requiring these fees are not tied to the lender. Title insurance, closing, appraisal, credit report, recording, tax stamps, and transfer taxes are all considered third party fees.