There are many new terms that you may come across when you are preparing to purchase your first home. Many individuals have heard about mortgages in the past, but you may not know what a mortgage is and how they work exactly. With a closer look at what mortgages are, you can more comfortably move forward with your home buying plans.
A mortgage essentially is a loan on a home. The home that you purchase will be used as collateral for the loan. This means that the bank or lender who issued the loan to you has the right to foreclose on the house if you fail to make payments as agreed. Typically, a home loan gives you the ability to spread out the purchase price of your home for 15 to 30 years. The loan may have a fixed interest rate, meaning that the interest rate and monthly payments remain the same for the entire length of the loan. However, some loans have a variable or adjustable interest rate, and this will create fluctuating monthly payment amounts. The interest rates are typically determined based on Federal Reserve rates.
How to Get a Mortgage
Mortgages or home loans are available to you through most banks as well as specialized real estate lenders and mortgage brokers. Typically, you will work directly with a loan representative as well as a loan processor when you apply for a loan. The loan representative’s primary job is to answer your questions about different loan programs and to assist with setting up your loan. The loan processor will gather outstanding documentation needed to finalize the loan process. The typical mortgage process may take between three to six weeks to complete.
Fannie Mae and Freddie Mac
The federal government extends a type of insurance to lenders who offer mortgages. These lenders face considerable financial risk if you default on your loan. Through the specialized insurance available through the federal government, the banks’ interests are protected when they issue their loans. Fannie Mae and Freddie Mac are different federal insurance programs that banks can benefit from.
With each mortgage payment you make, you will reduce your outstanding loan balance slightly. An amortization schedule will show you the debt reduction associated with each payment over the life of your loan. You may make larger payments than what is required to pay down the loan balance more quickly.
As you can see, a mortgage is an excellent financing option available for paying for a home purchase. If you are ready to apply for a mortgage, you can explore loan programs available through banks and home lenders.