Le monde de l'achat d'une maison peut être assez déroutant pour un premier acheteur. Le simple fait d'essayer de trouver le bon endroit pour vous peut être un processus difficile. Ajoutez à cela le fait d'essayer de comprendre toutes les questions financières et vous vous retrouvez avec un sacré mal de tête. La bonne nouvelle est que ce guide est conçu pour exposer toutes les notions de base sur les prêts hypothécaires et répondre à toutes les questions que vous pourriez vous sentir idiotes. 

What Exactly is a Mortgage?

To put things simply, a mortgage is a type of loan. Sometimes you might hear people refer to it as a mortgage loan or just as a mortgage, they are talking about the same thing. This loan is used to buy or refinance a home. The main purpose of getting a mortgage is so that you can buy a home without having to pay for it all upfront.The majority of people who buy a home do so with a mortgage. Let’s be honest, how many people do you know who could pay for the cost of a home out of pocket? 

Moreover, even if you have the money to pay for a house out of pocket it might be a smart idea to get a mortgage anyway. For instance, if you are a person who invests in properties, mortgages might allow you to use that capital to invest in multiple properties at once rather than going all in on one building. 

Other Important Definitions

Loans

A loan is a term which refers to a financial transaction in which one party receives a lump sum of money and agrees to pay it back. All mortgages are loans but not all loans are mortgages. 

Lender

In general the lender is the person who is providing the lump sum of money for the loan. For mortgages lenders are usually any sort of bank, credit union or online mortgage company.

Borrower

The borrower is the person who is asking for the lump sum and agreeing to pay it back to the lender. You might apply for a loan as an individual borrower or you might apply with a co-borrower. Adding a co-borrower can be helpful because it allows you to qualify for a larger amount.

Mortgage Payment

Simply the amount you pay every month toward your mortgage. Each monthly payment has four major parts: principal, interest, taxes and insurance.

Loan Principal

The main part… the amount you’re borrowing, the amount of money you have left to pay on the loan. 

Down Payment

This is the money you pay upfront to purchase a home. In most cases, you will have to put this money down to get a mortgage.

How Do I Get One?

A mortgage can be given by any sort of bank, credit union or online mortgage company. The institutions that offer mortgages are often referred to as lenders. The general process for getting a mortgage involves applying at one of these institutions (or more if you are shopping around – but be aware that every time you apply and the lender “pulls” your credit report, it may affect your credit score). In order to qualify for a mortgage you will want to have proof that you have a stable and reliable source of income. The lender will also be looking for a decent credit score (at least 580 for Federal Housing Administration loans or 620 for conventional loans) and a debt-to-income ratio of less than 50%. These factors and others like the current housing market and the type of loan you are asking for will determine the interest rate for your mortgage.

There Are Multiple Types?

I mentioned in the previous paragraph that there are different types of mortgages. Now there are a lot of special ones like VA loans, interest only loans and jumbo mortgage loans but the average person only needs to worry about two types: Federal Housing Administration (FHA) loans and conventional loans.

FHA Loans

FHA loans are loans that are backed by the Federal Housing Administration. A FHA loan is less risky for the lender because the FHA promises to reimburse the lender if you default on your loan. With this lower risk the lenders are able to offer these loans to people who are applying with lower credit scores and smaller down payments.

Conventional Loans

A conventional loan is any loan that is not backed by the federal government. These loans usually follow a set of guidelines set by government agencies called Fannie Mae and Freddie Mac. Conventional loans generally require the borrower to have a higher credit score and initial down payment to qualify compared to federally sponsored loans. However, a benefit of these loans is that they often come with better interest rates and lower fees. 

Interest Rates

Whenever anyone talks about mortgages, interest rates inevitably enter the conversation. When I say interest rates I mean the percentage that you pay to your lender as a fee for borrowing money. One of the biggest deciding factors that people use to determine which loan to take out or which lender to borrow from is interest rates. Now discussing how interest rates are determined gets complex quickly. In fact there are entire college courses taught about calculating interest rates. We are going to avoid the formulas today but if you are interested in learning more about the math behind it, here is a great resource. Instead, here we will define fixed and adjustable interest rates.

Fixed Rate

This one is named very accurately. A fixed rate is just an interest rate that stays the same for the entire length of your mortgage. Both the fixed and adjustable mortgage rates are determined by the lender based on how much of a risk the lender is taking by lending you the money. 

Adjustable Rate

This is a mortgage rate that changes during your loan based on the market. These interest rates are adjusted up or down every 6 months to a year. This means that the amount you pay each month on your mortgage can change due to your interest rate adjusting. Interestingly, most adjustable rate loans begin with a period of 5, 7 or 10 years in which the interest rate is fixed. Once that fixed period ends the adjustable rate begins and the mortgage payments may begin to change. You may want to speak with a mortgage lender to discuss what option is best for your situation. 

Do I Own My Home?

No, you do not fully own your home until the mortgage is paid off. Mortgages fall under the category of what is called “secured” loans. With this type of loan the borrower puts the home up as collateral. In short, if the borrower ever stops making payments on the loan the lender is allowed to take possession of the home. This is called foreclosure. It is for this reason that you need to make sure you are only taking out a loan for an amount that you feel comfortable knowing you will be able to pay back. 

Making Payments

After you acquire a loan and buy a house you will make monthly payments on that loan until the principal is paid off. You will make these payments over an agreed upon time known as the term of your loan. Most loan terms are 15 or 30 year but they can vary. The payments that you make each month will go toward paying off the principal and interest as well as covering insurance and taxes. Note: It is possible to NOT include your insurance and taxes in your mortgage payment. You would be paying these separate from your mortgage. It’s wise to discuss this with your lender. 

Amortization

Amortization is the term for how your loan payments are broken up over the course of the loan. The way that it usually works is that a higher portion of the payment goes toward the lender and paying down the interest on the loan at the beginning of the loan term. Then as time goes on your payments will be split in such a way that most of your money will go toward paying down the principal balance of the loan. 

Escrow

Why am I including escrow in the part of the article about making payments? Aren’t you in escrow while you are buying the house? Interestingly, escrow is a term that is used when an item such as money or property is temporarily transferred to a third party. So yes, you are in escrow when you are buying a house but escrow is also a part of the mortgage process. Let me explain.

Oftentimes lenders will set up escrow accounts to make it easy for you to pay all of the expenses related to the house and mortgage. This includes mortgage payments, property taxes and homeowners insurance. Because the home is technically owned by the lender during your mortgage period they have a vested interest in making sure that the property taxes and homeowners insurance bills are paid. The escrow account is an account that is managed by your lender so that they can easily send payments on insurance and taxes on your behalf. 

However, escrow accounts are only required on homes with a downpayment that is less than 20%. Therefore, you may be responsible for property taxes and insurance bills on your own if you made a down payment of more than 20%. Make sure you have this clear from the get go so that you know how much to budget each month for home related expenses.

Conclusion

I know that mortgage information can be a lot to take in. It is a very important step in the home buying process. First you have to get approved for the right mortgage for you, then find your home, make an offer, get final approval and close on the house. The good news is, if this was all overwhelming you always have a realtor who can help. We are trained to know this information backwards and forwards. For that reason, and plenty of others, it helps to have someone by your side when you are buying a home.  Hopefully this guide will help you to navigate the world of home buying a little more easily. Happy hunting!