how mortgages work
individuals and businesses use mortgages to buy real estate without paying the entire purchase price upfront the borrower repays the loan plus interest over a specified number of years until they own the property free and clear most traditional mortgages are fully amortized this means that the regular payment amount will stay the same but different proportions of principal vs interest will be paid over the life of the loan with each payment typical mortgage terms are for 15 or 30 years mortgages are also known as liens against property or claims on property if the borrower stops paying the mortgage the lender can foreclose on the property for example a residential homebuyer pledges their house to their lender which then has a claim on the property this ensures the lender s interest in the property should the buyer default on their financial obligation in the case of foreclosure the lender may evict the residents sell the property and use the money from the sale to pay off the mortgage debt the mortgage processwould be borrowers begin the process by applying to one or more mortgage lenders the lender will ask for evidence that the borrower is capable of repaying the loan this may include bank and investment statements recent tax returns and proof of current employment the lender will generally run a credit check as well if the application is approved the lender will offer the borrower a loan of up to a certain amount and at a particular interest rate homebuyers can apply for a mortgage after they have chosen a property to buy or even while they are still shopping for one thanks to a process known as pre approval being pre approved for a mortgage can give buyers an edge in a tight housing market because sellers will know that they have the money to back up their offer once a buyer and seller agree on the terms of their deal they or their representatives will meet at what s called a closing this is when the borrower makes their down payment to the lender the seller will transfer ownership of the property to the buyer and receive the agreed upon sum of money and the buyer will sign any remaining mortgage documents the lender may charge fees for originating the loan sometimes in the form of points at the closing there are hundreds of options on where you can get a mortgage you can get a mortgage through a credit union bank mortgage specific lender online only lender or mortgage broker no matter which option you choose compare rates across types to make sure that you re getting the best deal types of mortgagesmortgages come in various forms the most common types are 30 year and 15 year fixed rate mortgages some mortgage terms are as short as five years while others can run 40 years or longer stretching payments over more years may reduce the monthly payment but it also increases the total amount of interest that the borrower pays over the life of the loan various term lengths include numerous types of home loans including federal housing administration fha loans u s department of agriculture usda loans and u s department of veterans affairs va loans available for specific populations that may not have the income credit scores or down payments required to qualify for conventional mortgages the following are just a few examples of some of the most popular types of mortgage loans available to borrowers the standard type of mortgage is fixed rate with a fixed rate mortgage the interest rate stays the same for the entire term of the loan as do the borrower s monthly payments toward the mortgage a fixed rate mortgage is also called a traditional mortgage mortgage lending discrimination is illegal if you think you ve been discriminated against based on race religion sex marital status use of public assistance national origin disability or age there are steps that you can take one such step is to file a report with the consumer financial protection bureau cfpb or the u s department of housing and urban development hud with an adjustable rate mortgage arm the interest rate is fixed for an initial term after which it can change periodically based on prevailing interest rates the initial interest rate is often below market which can make the mortgage more affordable in the short term but possibly less affordable long term if the rate rises substantially arms typically have limits or caps on how much the interest rate can rise each time it adjusts and in total over the life of the loan a 5 1 adjustable rate mortgage is an arm that maintains a fixed interest rate for the first five years and then adjusts each year after that other less common types of mortgages such as interest only mortgages and payment option arms can involve complex repayment schedules and are best used by sophisticated borrowers these loans may feature a large balloon payment at the end many homeowners got into financial trouble with these types of mortgages during the housing bubble of the early 2000s 1as their name suggests reverse mortgages are a very different financial product they are designed for homeowners age 62 or older who want to convert part of the equity in their homes into cash these homeowners can borrow against the value of their home and receive the money as a lump sum fixed monthly payment or line of credit the entire loan balance becomes due when the borrower dies moves away permanently or sells the home 2within each type of mortgage borrowers have the option to buy discount points to buy their interest rate down points are essentially a fee that borrowers pay up front to have a lower interest rate over the life of their loan when comparing mortgage rates make sure you are comparing rates with the same number of discount points for a true apples to apples comparison average mortgage rates so far for 2024 