The Basics Behind Mortgages
Simply put, a mortgage is the most common method of using property to secure the payment of a debt. In most cases, mortgages only apply to real estate loans, and not other forms of property. By arranging a mortgage loan, an individual has the opportunity to purchase a home or land without having to come up with the full amount of money on the spot. Many borrowers can now apply for an online mortgage, as well as using traditional banks or mortgage brokers.
Many countries find it normal for homebuyers to seek funding via mortgage. In countries such as Great Britain, Spain, and the U.S., demand for homeownership is the highest among world countries, making domestic markets quite strong.
Who is Involved?
The Creditor – The creditor, or mortgage lender, possesses a legal claim to the debt that is being secured by the mortgage. He also is the one who lends the debtor the money to purchase the property. Generally speaking, the creditor is usually a bank or another type of financial institution that lends money to potential homebuyers.
For California mortgages and Florida mortgages, a private loan may also be made, often at a higher interest rate. These bad credit mortgages are usually a last resort loan for borrowers with poor FICO scores.
The Debtor – The debtor, or borrower, is required to meet certain loan conditions established by the creditor in order to maintain a positive status on his mortgage. Debtors are usually those who will be the homeowners.
Others – If necessary, one or both parties may need legal representation. If the debtor is having trouble finding a suitable creditor within a complex market, he may want to turn to a mortgage broker or financial advisor, who will in turn set the client up with the most competitive loan offer.
Types of Loans
There are two main types of mortgage loans:
Fixed Rate Mortgage (FRM) – For an FRM, the interest rate and monthly payment remains constant for the duration of the loan. In the United States, these types of loans usually have a term of 10, 15, 20, or even 30 years. The only way a borrower might see an increase in monthly payments would come as a result from a rise in property taxes. FRM payments due on the loan’s principal and interest are consistent.
Adjustable Rate Mortgage (ARM) – If the debtor is using an ARM, the interest rate of the loan will be steady for a shorter period of time. When this tenure is up, it will begin to adjust to a market index. In other words, a borrower could be paying less if the market is good, or more if the market is worsening. The more popular U.S. indices are the Prime Rate and the Treasury Index, also known as “T-Bill.” With an ARM, the borrower assumes more of the risk involved with interest rates. To compensate for this, lenders will generally offer the borrower an initial interest rate that is anywhere up to 2% lower than that of the average FRM.
The Mortgage Process
The process of securing mortgage refinancing is called origination. Origination begins when the borrower submits the mortgage application and necessary personal financial paperwork to an underwriter. Some banks have now incorporated “no-doc” and “low-doc” loans to their repertoire. These require the borrower to submit minimal personal financial information, and are most common when the borrower is self-employed. Because of the lenient nature of these types of loans, a mortgage quote is slightly higher and they are usually only offered to debtors with an excellent credit score.
If the debtor is having a hard time finding the right loan option, a third party might be involved. In a situation like this, the debtor looks to a mortgage broker for help in tracking down a creditor. The broker takes his client’s personal information and researches numerous lenders, selecting a few that match up the best given the borrower’s needs.
Sometimes the underwriter is dissatisfied with the paperwork provided by the debtor. In this case, the underwriter will impose additional conditions, known as stipulations, which generate some sort of guarantee that the debtor will be able to repay the money he borrows. This is done so that the lender can ensure as little risk as possible is involved in the transaction.
In many states such as California, Colorado and Texas, a borrower will often get a 2nd mortgage if they do not have at least 20% equity in their home. This temporary loan (sometimes confused with a HELOC loan)can be refinanced once the borrower reaches the 20% equity limit. Borrowers should always speak with a mortgage broker to find out the most favorable way to structure a loan for maximum benefit.