Questions about Mortgages?

As you begin searching for a new home, it’s important to understand the major terms used by real estate agents and lenders. Before you sign for a home loan, understand how mortgages work. There are some common questions many soon-to-be homeowners have, so now is the time to learn!

So, what is a mortgage?

Here’s the definition the FTC gives in this great glossary of terms:

“A loan using your home as collateral. In some states the term mortgage is also used to describe the document you sign (to grant the lender a lien on your home). It also may be used to indicate the amount of money you borrow, with interest, to purchase your house. The amount of your mortgage often is the purchase price of the home minus your down payment.”

This might sound a little scary, when you first start learning about loans. “A loan using your home as collateral…” That can seem a little daunting. That’s why the planning and budgeting stage of buying a home is so important.

You want to make sure you can make each payment in the future, even if your financial situation changes slightly. If you’re a first-time homebuyer here’s a great list to get you started.


Which comes first, the house hunting or the loan research?

It’s best if you begin looking at a loan before you start viewing homes. Once you know your down payment limits and budget, then you can start talking with a lender.

They’ll be able to tell you the range of the loan you should qualify for. But, know the difference between these two terms:

-Pre-qualified: This is based on a verbal affirmation with your lender. They’re able to give you an idea of the type of loan and rates you’ll be eligible for. But, understand this does not guarantee this is the loan you will get.

-Pre-approved: The pre-approval letter will be based on your financial documentation, your credit score, lending history, employment history, etc. It will state that you should be eligible for a certain loan amount with your chosen lender. Most of these letters have a time limit of authenticity before you must return to the lender to get a new one.

What are the different types of mortgages?

There are two main types of mortgages, though your lender may direct you to other options. Here is a breakdown from how the FTC describes these mortgages:  

-Fixed Rate Mortgage: This mortgage never changes. Your interest rate stays the same during the entire term of the loan.

-Adjustable Rate Mortgage(ARM): Mortgage that does not have a fixed interest rate throughout the entire time you’re paying back the loan. When you talk with your lender about this type of loan, ask them if there is an Interest Rate Cap.  You may find some lenders offer you a hybrid loan, where you have a fixed rate for a number of years, but not the entire term. After this time, they can adjust it periodically for the remainder of the loan’s term. When this type of loan is offered, many times it’s a lower rate for the short term, but remember that this rate has the potential to go up after your initial term ends.

Why are taxes a part of mortgage payments?

Firstly, they aren’t always. So, be sure to ask your lender if this is already included. If not, you may want to set aside money in your budget strictly for that yearly payment.

These taxes will go to your community to pay for things like schools, public services and roads.  


Why do some lenders require insurance?

When you buy a home, you’re paying more than just the mortgage price. You have taxes, closing costs and insurance.  

You’ll naturally want to get disaster insurance for your home, if there’s a fire or natural disaster. But, depending on your loan and your location, you may need to purchase additional insurance. This could include flood insurance, Private Mortgage Insurance or mortgage insurance if it’s backed by the Federal Housing Administration.

Mortgage insurance options are different depending on the loan, but it actually protects the lender, not you, if you stop paying. Learn more about this type of insurance here.

This is a great video explanation of the basics of mortgages!  If you have other questions about your search for a new home, please contact Leslie Heath: 270-331-2506.