1. What is a mortgage?
A mortgage is a loan used to buy property or land. The loan is ‘secured’ against the value of your home until it’s paid off. If you can’t keep up with your repayments, the lender can repossess (take back) your home and sell it to recover the money.
2. How does a mortgage work?
When you take out a mortgage, your lender agrees to lend you a sum of money to buy a property, and you agree to repay it back with interest over a set period of time (the “term”). The property is used as collateral until the mortgage is paid off.
3. What are the different types of mortgages?
There are two main types of mortgages: Fixed-rate and adjustable-rate. Fixed-rate mortgages have the same interest rate for the entire term of the loan, meaning your monthly payment won’t change. Adjustable-rate mortgages have an interest rate that can change over time, which means your monthly payment could go up or down.
4. How do I qualify for a mortgage?
Lenders look at several factors when determining your eligibility for a mortgage. This includes your credit score, income, employment history, and debt-to-income ratio. They will also consider the size of the loan you are asking for and the down payment you are willing to make.
5. What is a down payment?
A down payment is the amount of money you pay upfront when purchasing a home. It’s typically expressed as a percentage of the home’s total cost. The size of your down payment can influence the terms of your mortgage, including interest rates and monthly payments.
6. How much can I borrow?
The amount you can borrow depends on your income, credit score, current debts, the size of the down payment, and the price of the house you want to purchase. As a general rule, it’s recommended to spend no more than 28% of your gross monthly income on housing expenses.
7. What is the process of getting a mortgage?
The process starts with a pre-approval where lenders assess your financial situation to determine how much you can borrow. After you choose a property, you then apply for a mortgage. The lender will appraise the property and, if approved, will set the loan terms. Finally, you’ll close the deal, signing all the paperwork and receiving the funds.
8. What is PMI?
PMI, or Private Mortgage Insurance, is a type of insurance that you might be required to pay for if you have a conventional loan and make a down payment of less than 20% of the home’s purchase price. PMI protects the lender in case you default on the mortgage.
9. Can I pay off my mortgage early?
Yes, most mortgages allow you to make extra payments towards the principal to pay off your mortgage early. However, some mortgages may have prepayment penalties. It’s important to check with your lender about any additional fees.
10. What happens if I can’t make my mortgage payments?
If you can’t make your mortgage payments, it’s important to contact your lender immediately. They may be able to help with a temporary hardship arrangement, loan modification, or other solutions. If payments continue to be missed, the lender has the right to foreclose on the home, meaning they can take possession and sell the property to recover their money.
Remember, a mortgage is a significant financial commitment. Always seek professional advice and understand your obligations before signing on the dotted line.
11. What is the difference between interest rate and APR?
The interest rate is the cost of borrowing the principal loan amount. It can be variable or fixed, but it’s always expressed as a percentage. The Annual Percentage Rate (APR) is a broader measure that includes both your interest rate and any additional cost or prepaid finance charges such as the origination fee, points, private mortgage insurance, underwriting and processing fees.
12. How long does it take to get a mortgage?
The average time to get a mortgage, from application to closing, can vary greatly but typically takes 30 to 45 days. This can be shorter or longer depending on various factors including the lender’s workload, the borrower’s responsiveness, and the speed of the property appraisal.
13. What is a mortgage broker?
A mortgage broker is a licensed professional who compares mortgages from a variety of lenders to find the best option for their clients. They can save borrowers time by gathering various quotes and terms, but they do charge a fee for their service, which can be paid by the lender or borrower.
14. Can I get a mortgage with bad credit?
Yes, but it can be more challenging. Some lenders offer loans to people with poor credit, but these often come with higher interest rates to offset the risk. Government-backed loans, such as those offered by the Federal Housing Administration (FHA), may have less stringent credit requirements.
15. What is a mortgage refinance?
A mortgage refinance replaces your current home loan with a new one. People refinance to get a lower interest rate, to shorten their loan term, or to tap into their home’s equity.
16. What does it mean to ‘lock in’ a mortgage rate?
When you “lock in” a mortgage rate, the lender guarantees you a certain interest rate for a specific period of time while you complete the mortgage process. This protects you from potential interest rate increases before your loan closes.
17. What is a loan-to-value ratio (LTV)?
The Loan-to-Value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of the purchased asset (like a home). It’s used to assess the risk of the loan for the lender. A lower LTV means less risk for the lender.
18. What is a mortgage amortization schedule?
An amortization schedule is a complete table of periodic loan payments, showing the amount of principal and the amount of interest that make up each payment until the loan is paid off at the end of its term.
19. What is an escrow account for a mortgage?
An escrow account is set up by your mortgage lender to pay certain property-related expenses on your behalf like property taxes and homeowners insurance. It helps ensure these costs are paid on time to avoid penalties such as late fees or potential liens against the property.
20. What is an underwriter and what do they do?
An underwriter is a financial expert who evaluates your financial health and the property you’re buying to determine if you’re a good risk for a mortgage loan. They verify your income, check your credit history, and assess your home’s value before deciding to approve or deny a mortgage loan.
21. What is a down payment?
A down payment is a percentage of the home’s purchase price that you pay upfront. The remainder is financed through the mortgage loan.
22. What is the difference between fixed-rate and adjustable-rate mortgages?
A fixed-rate mortgage has a set interest rate that doesn’t change throughout the life of the loan. An adjustable-rate mortgage (ARM) has an interest rate that can change periodically based on changes in a reference interest rate.
23. What is a mortgage term?
A mortgage term is the length of time you have to repay the loan. The most common terms are 15 years and 30 years.
24. What is a mortgage refinance?
Refinancing a mortgage means paying off your existing loan and replacing it with a new one. This is often done to secure a lower interest rate or to change the loan term.
25. What is private mortgage insurance (PMI)?
PMI is insurance that protects the lender if you stop making payments on your loan. It’s usually required if your down payment is less than 20% of the home’s purchase price.
26. What is a home equity loan?
A home equity loan allows you to borrow against the equity you’ve built up in your home. It’s essentially a second mortgage.
27. What is a loan-to-value ratio (LTV)?
The LTV ratio is a calculation that compares the amount of the loan to the value of the property. Lenders use this ratio to assess risk.
28. What is a mortgage preapproval?
A mortgage preapproval is a lender’s offer to loan you a certain amount under specific terms. It’s based on a preliminary review of your creditworthiness.
29. What is a mortgage rate lock?
A rate lock guarantees a specific interest rate for a certain period during your loan process.
30. What are points in a mortgage?
Points, or discount points, are fees you pay to the lender at closing in exchange for a reduced interest rate.
31. What does it mean to default on a mortgage?
Defaulting on a mortgage means failing to make the agreed-upon payments. This can lead to foreclosure, where the lender takes possession of the home.
32. What is an interest-only mortgage?
With an interest-only mortgage, you only pay the interest on the loan for a set period. After this period, you begin to pay both principal and interest.
33. What are closing costs?
Closing costs are fees and expenses you pay when you close on your house, beyond the down payment. These can include origination fees, title insurance, and appraisal fees.
34. What is a conforming loan?
A conforming loan is a mortgage that meets the underwriting guidelines (including size of loan) of Fannie Mae and Freddie Mac, government-backed enterprises that buy mortgages from lenders.
35. What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration. FHA loans require lower down payments and credit scores than many conventional loans.
36. What is a reverse mortgage?
A reverse mortgage is a loan that allows older homeowners to borrow against their home’s equity. The loan doesn’t have to be repaid until the homeowner sells, moves out, or passes away.
37. What is an amortization schedule?
An amortization schedule is a table that details each payment of a mortgage over time. It shows the amount of each payment that goes towards interest and principal.
38. What is underwriting in the mortgage process?
Underwriting is the process by which a lender evaluates your creditworthiness and the risk of lending to you. The underwriter reviews your credit score, financial history, income, and the property details.