How to Compare Mortgages
How to Compare Mortgages
Banks, savings and loan associations, and credit unions were virtually the only sources of mortgages at one time. Today, a burgeoning share of the mortgage market includes nonbank lenders, such as Better, loanDepot, Rocket Mortgage, and SoFi.
If you’re shopping for a mortgage, an online mortgage calculator can help you compare estimated monthly payments, based on the type of mortgage, the interest rate, and how large a down payment you plan to make. It also can help you determine how expensive a property you can reasonably afford.
In addition to the principal and interest that you’ll be paying on the mortgage, the lender or mortgage servicer may set up an escrow account to pay local property taxes, homeowners insurance premiums, and certain other expenses. Those costs will add to your monthly mortgage payment.
Also, note that if you make less than a 20% down payment when you take out your mortgage, your lender may require that you purchase private mortgage insurance (PMI), which becomes another added monthly cost.
If you have a mortgage, you still own your home (and not the bank). Your bank may have loaned you money to purchase the house, but rather than owning the property, they impose a lien on it (the house is used as collateral, but only if the loan goes into default). If you default and foreclose on your mortgage, however, the bank may become the new owner of your home.
Why do people need mortgages?
The price of a home is often far greater than the amount of money that most households save. As a result, mortgages allow individuals and families to purchase a home by putting down only a relatively small down payment, such as 20% of the purchase price, and obtaining a loan for the balance. The loan is then secured by the value of the property in case the borrower defaults.
Can anybody get a mortgage?
Mortgage lenders will need to approve prospective borrowers through an application and underwriting process. Home loans are only provided to those who have sufficient assets and income relative to their debts to practically carry the value of a home over time. A person’s credit score is also evaluated when making the decision to extend a mortgage. The interest rate on the mortgage also varies, with riskier borrowers receiving higher interest rates.
Mortgages are offered by a variety of sources. Banks and credit unions often provide home loans. There are also specialized mortgage companies that deal only with home loans. You may also employ an unaffiliated mortgage broker to help you shop around for the best rate among different lenders.
What does fixed vs. variable mean on a mortgage?
Many mortgages carry a fixed interest rate. This means that the rate will not change for the entire term of the mortgage—typically 15 or 30 years—even if interest rates rise or fall in the future. A variable or adjustable-rate mortgage (ARM) has an interest rate that fluctuates over the loan’s life based on what interest rates are doing.
How many mortgages can I have on my home?
Lenders generally issue a first or primary mortgage before they allow for a second mortgage. This additional mortgage is commonly known as a home equity loan. Most lenders don’t provide for a subsequent mortgage backed by the same property. There’s technically no limit to how many junior loans you can have on your home as long as you have the equity, debt-to-income ratio, and credit score to get approved for them.
Why it called a mortgage?
The word “mortgage” comes from Old English and French meaning “death pledge.” It gets that name since this type of loan “dies” when it is either fully repaid or if the borrower defaults.
The Bottom Line
Mortgages are an essential part of the home buying process for most borrowers who aren’t sitting on hundreds of thousands of dollars of cash to buy a property outright. Different types of home loans are available for whatever your circumstances may be. Different government-backed programs make it possible for more people to qualify for mortgages and make their dream of homeownership a reality.
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