How does a mortgage work?

Question

OK, im looking at buying a house and though I have a vague understanding of what a mortgage is, its still pretty confusing. Can someone explain to me how it works, what i am paying, etc...

Thanx in advance

Answer 1

Decide on how much you want to spend, if you want to escrow the taxes and insurance. Say the taxes are 1200 a YR and insurance 800 a year (just an estimate, ok) That is 2,000 a year divided by 12 = 166.66 If you paid 1,000 a month now - (166.66) your P/I Principle and Interest would be 833.34. Now you decided on the price range you are looking into. If you have great credit, a 1 loan at 130,000 at a rate of 7 percent over a 30 year time would be 864.89 - This is just a estimate - ok - It greatly depends if you need help with closing cost, if you have money to bring into the table - so you do not have to borrow the full 100 percent. Rates are still in the 6's but they are getting higher - ok. If your credit is in the 500's to low 600's than the rate would be higher - lots of factors to consider.

Talk with a broker, a broker underwrites for many company's (I underwrite for 150 companies) so I only have to pull credit 1 time, and they look at my credit. A single lender (not a broker) has programs available, but they may not be able to help you and your situation, so you go elsewhere, and than that person pulls your credit (see what I mean.) If you shop, your credit is pulled and that is considered a soft pull, for a 30 day period. Just like shopping for a auto, it is good for 30 days. If you apply for a credit card, that is considered a "hard" pull and it drags down your credit score. When looking for a home, please do not apply for a credit card, Department Charge Card, Gasoline Card or make any major purchases, like a auto, etc. This will pull your credit down

Try to find someone (broker) that will pull your credit one time, and submit your loan application to company's that will go off his credit report. By the way, a loan application is called a 1003, and they will issue you a GFE (Good Faith estimate, with in 3 days, that is per the RESPA laws, and the TIL (Truth in Lending). This will tell you the up-front closing cost (etc) associated with your loan. This is a estimate only - not the final - but it does help you figure things out.

Some companies want you to escrow you taxes and insurance. Other's may not require it...Some companies add a .25 to the interest rate if you want to escrow waver...FHA loans have to escrow (at least they used to)

Just a reminder, you will get a 1099 INT form, for interest you paid each year at tax time, you can take that off if you go 1040 long form. Sign up for your Mortgage exception and Homestead exception and any other exceptions at your local court house 1 month after you close on your loan. This will LOWER your PROPERTY TAXES. Your Broker should mention it to you, or your closer at the closing.

Lenders look at the middle score to qualify a person - and if your credit is low, than you will be going SUB-Prime, and any amount over 80 percent does not have MI - There are alot of companies I underwrite for that does NOT charge MI - normally the rate is slightly higher. Say you got qualified and your rate was 8.50 at par (Par, means that is what rate the lender quotes you, with no addon's to the rate for the lender to make pts on the back - some Lo"s add pts on the rate to make their money - instead of charging it up front). The 8.50 does not have MI included. (Rates are estimates only, since I do not know what your credit is like, your rate could be lower, this is just a estimate - ok)


FHA loans have MI included, Conforming A+ borrower's loans have MI included, but the rates are better starting in the mid to high 6's (with rates going up.) The more money you borrow - the higher the rate normally. There are alot of factors involved.

Go to these websites:

1. http://www.nehemiahcorp.org/

http://www.fanniemaefoundation.org/...

http://www.fha-home-loans.com/

http://www.freddiemac.com/

The Government websites has a First Time Home Buyer Booklet - you can download and print off.

Also - It greatly depends if you need help with closing cost, (The seller could do Seller Help toward your closing cost). If that is the case, I normally tell my clients NOT to hackle over the price, since you are asking for closing cost help - especially if the home is thru a realitor, and the seller has to pay the realitor their fee which runs from 3-6 percent of the selling price, and you ask for 3-5 percent toward closing cost -assistance) Follow me so far??

Good Luck to you, and happy house hunting. Check out my web site for more helpful information.

Answer 2

A mortage is a loan, there rest works from there. You borrow the money and pay back the money borrowed at an agreed interest. Beyond that there are two types of mortage:
- endowment mortage, where the bank lends you the money on the basis of the expected value of the loan over the period, so for example if the money is lent when the stock markets are doing really well, you can get a smaller loan. The disadvantage is that they get it wrong, so you end up with smaller payments, but found out at the end of the 25 years that you still owe thousands of pounds because the expected value doesn't add up to the real value

Safer is a repayment mortgage where you pay back the initial sum against some agreed conditions (interest rates) with the bank. Payments may be higher but there are no suprises at the end.

Afterwards you choose between fixed and variable. Fixed is surer, variable means you might pay less, but then again you might pay more.

Beyond that, most mortages are renegotiable fairly quickly in, if you just threaten to change and take the mortgage elsewhere. I have had a mortage for 10 years, and the ease of switching or renegotiating seems to be higher now - we have pretty much always been able to get a better deal than the standard rate.

Answer 3

This is kind of tough to explain quickly. The best advice I can give you is to buy the David Bach's "Automatic Millionaire Homeowner." It is meant for 1st time home owners. I just bought my home a few months ago, so I can totally relate. I found this book incredibly helpful. It's easy to understand.

Edit: In case it's helpful, here's a "quick overview." Your mortgage is basically a function of 3 things: The cost of the house, the interest rate you secure and the downpayment you make. The standard/starting point mortgage is 30 year fixed (but there a many variations from that). Typical down payment is 20%, but again, many variations from that (e.g. I only paid 10%).

To figure out the monthly payment you would make take the remaining mortgage (the total price - downpayment) and the interest rate. You can use below link that has a mortgage calculator.

Also, would recommend that you speak to someone live about this (e.g. someone from a bank) who can explain to you how it works and give you some sample rates.

Good luck! I know it feels really confusing and intimidating. But, once you get your head wrapped around it, it will make a lot more sense.

Answer 4

Not to add to the confusion ... lol

A mortgage is a loan in which you pay the bank interest for using their money. Interest is only charged on the principal amount. So for instance, if your payments are (hypothetical!) $2,500 ... $2,300 goes to interest and $200 goes to principal. The next month it would be $2,250 goes to interest and $250 to principal .. because your principal goes down in small incriments, your interest goes down a little each month. The actual payment amount stays the same, the amount to interest and principal changes over time.

Payments are always in arrears, meaning if your payment is due Aug. 1, the payment you make will be for July, so you're only paying UP TO Aug 1st. It's not like rent where you pay ahead. Mortgage loans you pay for the month behind.

Depending on your credit, loan program and the loan to value ratio (% of sales price you finance) you may have to pay impounds (also called an escrow account in some areas). They figure out how much your property taxes and hazard insurance will be per year and break it up into 12 month incriments and add it to your loan payment. If you lender doesn't require it, you can choose to do it as well.

Personally, I think impounds are a great idea, especially for a first time buyer. You don't have to worry about coming up with huge sums of money when the property taxes are due, you've already put some away via the lender to pay them.

Hope some of this helps :)

Good luck :)

Answer 5

A mortgage is the loan that you get to buy a house. It is usally set up for 15 or 30 years. That is the term. Each month you will make a payment that consists of interest and principal. Interest is what you owe the mortgage company for advancing you the money and the principal is the actual amount applied to your loan balance. You may also have to pay PMI and an escrow account. PMI is personal mortgage insurance. It is an insurance you pay to help secure your loan until you have paid off more than 20% of your loan. Escrow is money you pay ahead to cover property taxes and home insurance. It is part of what you pay in each month and then your mortgage company pays those bills for you. Typically you have to be at least 3 months ahead on these. A downpayment will be required. This is an amount of money that you pay at the very beginning of the loan.

Answer 6

A mortgage is like a loan that a bank or building society would give you to buy a house with. You then pay back a certain amount of money a month with interest. You would probably find it easier to save a deposit first of all and these are usually around 5% of the value of the property. A mortagge can only be awarded to you if you are on a nough money to support the monthly repayments. Its probably best talking to a mortgage advisor who would give you free advice on affordability and current interest rates around the market.

Answer 7

I have my first motgage and this is how it works - with a repayment mortgage you pay back the amount you borrow plus intrest every month, so each year you repay the interest due plus part of the capital amount until the full amount is paid back - could be about 25 years.
Interest only mortgage means you only pay the interest on the mortgage, not the capital you borrow - this can be in conjunction with a savings or investment policy to help pay the capital when the time is due.

Speak to the building societies as they will be able to give you more information,.

Answer 8

It is basically another word for a loan on your home. Mortgages have different terms, and qualifications.

There is a repayment period, interest rate, and some interest rates change over time. As your interest rate goes up, so does your payment.

A good rule of thumb when you are trying to figure out your monthly payment is P.I.T.I., Principal, Interest, Taxes and Insurance. These are things that you will have to pay for every month. Some home builders will also have Association Fees, or Special Assessments.

Answer 9

Simple answer - The same as you being a tenant. The differance is that as a tenant you rent from a landlord with the house never being yours. A mortgage - you rent from the lender who in returns offers you a chance to pay it off, so becoming your home. Never believe anyone who says they own there own home until they have no mortgage on it. If they stop payments to the lender then you can see who is evicted - the person who does not own it!!!! Need any help contact me

Answer 10

The best thing to do is to see a financial adviser. I'm in exactly the same position where I don't understand all the Jargon and don't know what type of mortgage is the best suited to me, so I asked a similar question and that's what I was recomended to do. Good Luck