Mortgage Loans
Before you start applying for home loans, it’s important to understand what a mortgage is and how it works. You should also become familiar with the various types of mortgage loans available, as well as how to get approved for a loan.
A mortgage is a contractual agreement between a borrower and a lender for the purpose of buying real estate. More specifically, a mortgage is a written document verifying that the lender has a lien on a property as security for the repayment of a debt. A lien is basically a legal claim to property which is imposed by a contract (the mortgage is that contract).
There are two basics types of mortgage loans, those with fixed interest rates and those with adjustable interest rates:
- A fixed-rate mortgage loan, also known as a “fixed-interest mortgage,” has a predetermined interest rate that stays the same throughout the life of the loan. Because the interest rate doesn’t change, the monthly mortgage payments don’t change either. FRMs are popular because they offer borrowers the stability of an unchanging monthly payment amount.
- An adjustable-rate mortgage (ARM) has an interest rate that adjusts periodically based on current market rates. With ARMs, lenders can offer low initial rates in exchange for sharing the future risk of higher interest rates with the borrower. Adjustable-rate mortgage loans are generally more complicated than fixed-rate mortgages and they come in a variety of shapes and sizes.
FHA mortgage loans are managed by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD). The FHA does not issue mortgage loans ― it provides mortgage insurance on loans made by FHA-approved lenders, protecting them against losses in case the borrowers fail to repay their debts.
Getting pre-qualified or pre-approved for a mortgage loan is smart because it gives you an idea of the price range you can afford. It also makes you a more attractive buyer and equips you with some negotiating power.