Mortgage Broker - Rate, Calculator, Overview, Examples, Types & Payments
A loan provided by a mortgage lender or a bank that enables an individual to purchase a home.

What is a Mortgage?

A mortgage is a loan given by a bank or mortgage lender that enables a person to buy a house or other property. While loans for the entire cost of a home are feasible, it's more typical to obtain one for roughly 80% of the home's worth.

The borrowed funds must be repaid over time. The house is used as security for the loan money taken out to buy the house.

What Is The Distinction Between A Mortgage And A Loan?

Any financial arrangement where one party receives a lump sum and agrees to repay the money is referred to as a "loan."

A mortgage is a specific kind of loan used to fund real estate. Although a specific kind of loan, not all loans are mortgages.

Loans that are "secured" are mortgages. In the event that they default on a secured loan, the borrower pledges collateral to the lender. The house serves as the collateral in a mortgage situation. In a procedure called as foreclosure, your lender may seize possession of your home if you stop paying your mortgage.

Types of Mortgages

The two most common types of mortgages are fixed-rate and adjustable-rate (also known as variable rate) mortgages.

1. Fixed-Rate Mortgages

Fixed-rate mortgages provide borrowers with an established interest rate over a set term of typically 15, 20, or 30 years. With a fixed interest rate, the shorter the term over which the borrower pays, the higher the monthly payment. Conversely, the longer the borrower takes to pay, the smaller the monthly repayment amount. However, the longer it takes to repay the loan, the more the borrower ultimately pays in interest charges.

The greatest advantage of a fixed-rate mortgage is that the borrower can count on their monthly mortgage payments being the same every month throughout the life of their mortgage, making it easier to set household budgets and avoid any unexpected additional charges from one month to the next. Even if market rates increase significantly, the borrower doesn’t have to make higher monthly payments.

2. Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) come with interest rates that can – and usually, do – change over the life of the loan. Increases in market rates and other factors cause interest rates to fluctuate, which changes the amount of interest the borrower must pay, and, therefore, changes the total monthly payment due. With adjustable rate mortgages, the interest rate is set to be reviewed and adjusted at specific times. For example, the rate may be adjusted once a year or once every six months.

One of the most popular adjustable-rate mortgages is the 5/1 ARM, which offers a fixed rate for the first five years of the repayment period, with the interest rate for the remainder of the loan’s life subject to being adjusted annually.

While ARMs make it more difficult for the borrower to gauge spending and establish their monthly budgets, they are popular because they typically come with lower starting interest rates than fixed-rate mortgages. Borrowers, assuming their income will grow over time, may seek an ARM in order to lock in a low fixed-rate in the beginning, when they are earning less.

The primary risk with an ARM is that interest rates may increase significantly over the life of the loan, to a point where the mortgage payments become so high that they are difficult for the borrower to meet. Significant rate increases may even lead to default and the borrower losing the home through foreclosure.

Mortgages are major financial commitments, locking borrowers into decades of payments that must be made on a consistent basis. However, most people believe that the long-term benefits of home ownership make committing to a mortgage worthwhile.

Mortgage Payments

Mortgage payments usually occur on a monthly basis and consist of four main parts:

1. Principal
The principal is the total amount of the loan given. For example, if an individual takes out a $250,000 mortgage to purchase a home, then the principal loan amount is $250,000. Lenders typically like to see a 20% down payment on the purchase of a home. So, if the $250,000 mortgage represents 80% of the home’s appraised value, then the homebuyers would be making a down payment of $62,500, and the total purchase price of the home would be $312,500.

2. Interest
The interest is the monthly percentage added to each mortgage payment. Lenders and banks don’t simply loan individuals money without expecting to get something in return. Interest is the money a lender or bank earns or charges on the money they loaned to homebuyers.

3. Taxes
In most cases, mortgage payments will include the property tax the individual must pay as a homeowner. The municipal taxes are calculated based on the value of the home.

4. Insurance
Mortgages also include homeowner’s insurance, which is required by lenders to cover damage to the home (which acts as collateral), as well as the property inside of it. It also covers specific mortgage insurance, which is generally required if an individual makes a down payment that is less than 20% of the home’s cost. That insurance is designed to protect the lender or bank if the borrower defaults on his or her loan.

Who Gets A Mortgage?

Most people who buy a home do so with a mortgage. A mortgage is a necessity if you can’t pay the full cost of a home out of pocket.

There are some cases where it makes sense to have a mortgage on your home even though you have the money to pay it off. For example, investors sometimes mortgage properties to free up funds for other investments.

How Does A Mortgage Loan Work?

When you get a mortgage, your lender gives you a set amount of money to buy the home. You agree to pay back your loan – with interest – over a period of several years. The lender's rights to the home continue until the mortgage is fully paid off. Fully amortized loans have a set payment schedule so that the loan is paid off at the end of your term.

The difference between a mortgage and other loans is that if you fail to repay the loan, your lender can sell your home to recoup its losses. Contrast that to what happens if you fail to make credit card payments: You don’t have to return the things you bought with the credit card, though you may have to pay late fees to bring your account current in addition to dealing with negative impacts on your credit score.

How Do I Get A Mortgage?

The mortgage loan process is fairly straightforward if you have a regular job, adequate income and a good credit score.

There are several steps you’ll need to take to become a homeowner, so here’s a rundown of what you need to do.

Get Preapproved Or Be Ready To Show Proof Of Funds
You’ll need a preapproval to be taken seriously – by real estate agents and sellers – in today’s real estate market.

Preapproval
It’s a good idea to get an initial approval from your mortgage lender before you start looking for homes. Getting preapproved upfront can tell you exactly how much you’ll qualify for so you don’t waste time shopping for homes outside your budget. In some very hot seller’s markets around the U.S., you may not be able to get a real estate agent to meet with you before you have a preapproval letter in hand.

There’s a difference between prequalification and preapproval. Prequalification involves sharing verbal or written estimates of your income and assets with your lender, who may or may not check your credit.

You can use our home affordability calculator to get a sense of what you can afford as you begin thinking about buying a home, but the numbers you use aren’t verified, so it won’t carry much weight with sellers or real estate agents.

All-Cash Purchases
In many real estate markets, sellers have the luxury of choosing a buyer from among several all-cash offers. That means that sellers avoid the uncertainty of waiting for the buyer’s mortgage to be approved.

In those situations, buyers should attach a Proof of Funds letter with their offer so that the seller is certain that the buyer has the money they need at the ready to complete the transaction.

Shop For Your Home And Make An Offer
Connect with a real estate agent to start seeing homes in your area. You may find that because of high demand and COVID-19 restrictions, many homes can be viewed online only. In fact, the number of sales completed online during the pandemic has skyrocketed.

In other words, your buyer’s agent today will likely be your eyes and ears like never before. Real estate professionals can help you find the right home, negotiate the price and handle all the paperwork and details.

Get Final Approval
Once your offer has been accepted, there’s a bit more work to be done to finalize the sale and your financing.

At this point, your lender will verify all the details of the mortgage – including your income, employment and assets – if those details weren’t verified upfront. They’ll also need to verify the property details. This typically involves getting an appraisal to confirm the value and an inspection to evaluate the condition of the home. Your lender will also hire a title company to check the title of the home and make sure there are no issues that would prevent the sale or cause problems later.

Close On Your Loan
Once your loan is fully approved, you’ll meet with your lender and real estate professional to close your loan and take ownership of the home. At closing, you’ll pay your down payment and closing costs and sign your mortgage papers.

Who Are The Parties Involved In A Mortgage?
There are up to three parties involved in every mortgage transaction – a lender, a borrower and possibly a co-signer.

Lender
A lender is a financial institution that loans you money to buy a home. Your lender might be a bank or credit union, or it might be an online mortgage company like Rocket Mortgage®.

When you apply for a mortgage, your lender will review your information to make sure you meet their standards. Every lender has their own standards for who they’ll loan money to. Lenders must be careful to only choose qualified clients who are likely to repay their loans. To do this, lenders look at your full financial profile – including your credit score, income, assets and debt – to determine whether you’ll be able to make your loan payments.

Borrower
The borrower is the individual seeking the loan to buy a home. You may be able to apply as the only borrower on a loan, or you may apply with a co-borrower. Adding more borrowers with income to your loan may allow you to qualify for a more expensive home.

Co-Signer
Sometimes, because of a negative credit history or no credit history, a lender may ask a prospective borrower to find a co-signer for the mortgage. This is also synonymous with a co-borrower. A co-signer isn’t merely vouching for your character. They are entering into a legally binding contract that will hold them responsible for paying for the mortgage with or without any rights of ownership, should the borrower default on the loan.