A Beginner’s Guide to Mortgage Lending
Navigating the road to homeownership is a challenge for many people, but it doesn’t have to be. Armed with a thorough understanding of the mortgage lending process, you will find this road much easier to traverse. Keep reading to learn the basics.
What Is a Mortgage?
Simply put, a mortgage is a loan from a bank to a borrower to enable them to buy a home. In this transaction, the home is collateral. That means if the borrower stops paying their monthly mortgage bill, they risk foreclosure, which is the legal process through which the borrower transfers ownership of the house to the bank. Skipping mortgage payments also puts credit scores in danger.
Fixed-Rate Vs. Adjustable-Rate Mortgages
You can find various types of mortgages that appeal to different borrowers, but the two most popular mortgage types are fixed-rate mortgages and adjustable-rate mortgages (ARMs). Fixed-rate mortgages have the same interest rate throughout the life of the loan, which can be anywhere from 15 to 30 years. This also secures the lowest monthly payments for the loan. Typically, borrowers who plan to stay in their homes for at least 10 years are willing to pay more in total interest in exchange for the stability of this loan.
ARMs tend to have lower initial interest rates, but these rates are adjusted periodically (usually annually). The interest increases when the economy is booming, but it may or may not decrease in times of recession. The latter is specified in the fine print of the mortgage agreement, so it’s critical that potential ARM borrowers read it thoroughly. Some lenders offer mortgages that are backed by government agencies, which offers veterans, low-income borrowers and rural community members the opportunity to obtain a relatively less expensive mortgage.
Down Payments and PMI
Generally borrowers make a down payment that comprises 20 percent of the price of the home, and the mortgage makes up the remaining 80 percent. However, borrowers who are unable to pay 20 percent up front usually need to pay for private mortgage insurance (PMI) — insurance that pays back the bank if the borrower cannot.
The PMI (and PMI payments) will automatically end when the borrower pays back 22 percent of the price of the home (in other words, accrues 22 percent equity in their home). If the borrower’s mortgage is considered high risk, then they might have to build more than 22 percent equity in their home before the PMI terminates.
After parties sign off on a mortgage, it is legally processed. This act results in closing costs. Each individual closing-related cost goes towards taxes, creating the loan and transferring ownership of the property. Borrowers with a good credit score should be able to negotiate some of these fees, which reduces the overall cost of the mortgage. These fees enable the transaction to close and allow the borrower to become a homeowner.
If you are interested in buying a home, contact Citizens National Bank today. You’ll find information on a variety of subjects, personalized financial advice and competitive interest rates.