Mortgages

What is a Mortgage?

A mortgage is a type of loan. Mortgages are financing options for those that are buying property. These are large amount loans that are secured by the property itself. In other words, should a borrower stop paying their mortgage, the lender has the right under mortgage disclosures to take steps to seize the property, list and resell it, and recoup some or all of the moneys owed.

Mortgage loans are very common in the US. As of the half-year mark in 2019, the US had $13.86 trillion in outstanding household debt across the United States. The portion that represents mortgage debt totals $9.81 trillion, which is just over 70% of the total. According to Home Mortgage Disclosure Act (HMDA) reporting, first mortgages represented 85% of total mortgage loans in the US, while secondary mortgages represented nearly 15%.

How do Mortgages Work?

Where to Apply for Mortgages

When someone wants to buy a property, they are likely to seek financing. While cash property sales happen, they are much less common than financed home purchases.

People can apply for mortgages through a variety of channel:

• Traditional Banks – large bank chains or smaller, local banks offer mortgages
• Credit Unions – these community-centered, not-for-profit financial institutions offer mortgage products
• Online Banks – this growing category of digital banking institutions offer competitive mortgage rates
• Mortgage Brokers – brokers work with banks to get mortgage options to buyers. They often liaise with realtors, or work with a specific bank, and are intermediaries in the mortgage process

Down Payments

Mortgages nearly always require the borrower to provide a down payment as part of the transaction. The down payment is most often between ten and twenty percent of the total property cost. This means that many home buyers have to save money to be able to afford a down payment. The higher the down payment, the lower the monthly payment will be. This is partially due to the fact that the down payment goes into the equity the buyer has in the house, and also due to lower interest rates. Putting down more money can result in a lower interest rate, as the lender sees the buyer with a high down payment as more stable and less of a risk.

Buyers that cannot access a down payment of ten to twenty percent can seek mortgages with a lower down payment amount. This might mean that they end up with a higher interest rate, or needing to pay Private Mortgage Insurance (PMI) as part of their monthly payment.

Variable vs. Fixed Rate Mortgages

Mortgages fall into fixed or variable rate types. Fixed rate mortgages have an unchanging interest rate for a set time period – usually fifteen or thirty years. These rates are locked in and do not change, regardless of market changes or any other variables. Mortgage holders with fixed rate mortgages enjoy the predictability of the terms. Fixed mortgages can be refinanced to get a better rate, and this involves paying closing costs, and renegotiating the terms of your mortgage, often with another lender. Variable rates are different in that they lock a rate in for a shorter period of time, such as five years, and then the rate adjusts to the market rate in effect at the time. This is a less predictable option and can be risky, particularly if the Fed raises rates considerably from the time period the mortgage was originated. These mortgages can also be refinanced, but options for refinancing may be limited in a high rate environment.

Documentation Requirements

When applying for a mortgage, people need to provide a number of financial documents that help the lender verify the borrower’s financial situation in order to assess the overall risk of the loan. This usually includes:

Timing of Mortgage Process

The mortgage process, from application to closing, most often takes anywhere between thirty and ninety days. It has specific stages, such as origination, underwriting, signing the Purchase and Sales agreement, getting a property assessment, inspecting the property and closing. There are periods of time where the borrower can change their mind and back out of the loan, and there may or may not be a financial penalty for changes, depending on where the buyer is in the mortgage process.

Preparing to Apply for a Mortgage

If you are planning to buy a property, there are a few steps you can take to prepare to apply for a mortgage:

• Look up your credit score and view your credit report
  This allows you to get an idea of how equipped you are to get a good rate. If your credit score is less than 600, you may want to wait to apply for a mortgage and take some time to improve your credit rating by paying down debts.
• If you are a first-time home buyer, explore special programs and offers
  First-time buyers are in an advantageous place in that financial institutions, mortgage brokers and even real estate agents offer them special incentives. The federal government also has first-time buyer programs. Make sure you share your first-time buyer status with all parties involved in helping you. Do your own research that compares different first-time buyer options to ensure that you get the best deal on your financing.

• Run a mortgage calculator for the amount you hope to borrow
  There are a number of general mortgage calculators online. If you put in the amount you want to borrow, as well as the amount you can put down, a mortgage calculator can give you an estimate of what you might expect your monthly payment to be. This can give you an idea if you can truly afford the mortgage size you are seeking.
• Gather your documents
  It is a good idea to have access to your tax returns for the last two years, and proof of income documents for six months prior to applying.
• Read financial news and predictions
  Borrowers can benefit greatly from watching the market. Upcoming recession means lower rates. Good economic conditions mean higher rates. These have an effect on the mortgage rates that will be available.
• Consider your personal approach to risk
  Ask yourself if you are more comfortable with more predictability with mortgages, or if you are ok with more risk and volatility in exchange for shorter term financial gains. Understanding this about yourself can help your figure out if fixed or variable options are better for your mortgage selection.

Mortgages are far from simple, and building knowledge about them can greatly help you make borrowing decisions that are can feel good about. There are a number of options for today’s mortgage borrowers, and they change and evolve as the economic markets do.