It’s everyone’s dream to become a homeowner. Sadly, the savings of most individuals and households may not be enough to pay for the price of a home. Fortunately, mortgages allow homebuyers to commit a small down payment and obtain a loan to cover the deficit.
The property’s value serves as security for the loan if the borrower defaults on the loan repayment. Essentially, it’s a win-win situation for both the borrower and the lender. Are you considering financing the purchase of the desired property with a mortgage loan? Continue reading to learn the ins and outs of mortgages.
A mortgage is a type of loan used to purchase or maintain any kind of real estate, including home or land. The property primarily secures the loan, and the cost of a mortgage typically depends on the loan type, its term and the interest rate.
When looking for a mortgage, we recommend shopping around to compare and find the best rates. If you want to shop for a mortgage, consider using an online mortgage loan calculator to compare loans based on the mortgage type, interest rate and estimated monthly payments.
In the past, traditional lenders like banks and credit unions were the only ones offering mortgage loans. Today, nontraditional lenders have taken a significant share of the global mortgage market, primarily giving borrowers more options. Take, for example, Tangerine Mortgage, which is a popular mortgage choice for Canadians. They’re a digital bank and a subsidiary of Scotiabank. Like most traditional banks, they offer standard banking services, such as checking accounts and credit cards.
How Mortgages Work
Private individuals and corporate entities leverage mortgages to purchase properties without outright paying the total amount up front. The mortgage process starts with applying to a preferred mortgage lender. Mortgage applications usually take place after choosing a property or while finding one.
Getting preapproval for a mortgage can give homebuyers a comparative edge in the competitive real estate market. To qualify for a mortgage as a borrower, you must meet several requirements set by the lender, including down payments and minimum credit scores. Essentially, the lender wants to know if you can meet the financial obligations of the mortgage.
Lenders pass mortgage applications through a meticulous underwriting process before they approve. They usually check your bank and investment statements, proof of current employment, tax returns, and credit history. Afterward, the lender provides a specified loan at a particular interest rate to purchase the property. You agree to repay the loan plus interest over a specified period until you own the property. Remember, as the borrower, you have to pay a specified down payment to the lender. Also, keep in mind that mortgages are regarded as claims on property. The lender may decide to foreclose on the property if you default.
Types of Mortgages
Mortgage types vary according to the borrower’s needs. Perhaps due to this, a significant proportion of borrowers find it daunting and overwhelming to shop around for a mortgage. Below, we’ve listed the most popular types of mortgage loans.
The most significant aspect of fixed-rate mortgages is that the interest rate and monthly payments stay the same throughout the loan term. This type of mortgage is also referred to as a traditional mortgage.
Adjustable-Rate Mortgage (ARM)
With this type of mortgage, the interest rate stays the same for an initial term; afterward, it changes periodically according to prevailing interest rates. Lenders often give borrowers a below-market rate for the initial period to make the loan more cost-effective in the short term. However, the mortgage loan becomes less affordable in the long run, especially when the rate increases significantly. The good thing is that ARMs have limits on how much interest rates can rise throughout the loan.