Owning a home is an essential part of the American dream. Unfortunately, only a few are fortunate enough to be able to pay the total cost of a property out of pocket. For this reason, taking out a mortgage is one of the most common routes future homeowners in America choose to realize their dream of a home they can call their own. Moreover, even those who can pay off the entire sum directly, such as investors, sometimes get a mortgage on their property to free up their funds and be able to invest in other things.

If you are looking into getting a mortgage, you should familiarize yourself with all the basics before you embark on that journey. There is a lot to consider, including the basic mortgage lingo, what you need to qualify for a loan, and how to calculate a mortgage payoff on your own.

Mortgage Defined

A mortgage, or a mortgage loan, is an agreement the borrower makes with a mortgage lender (mortgagee) when purchasing or refinancing a property. A mortgagee is either a financial institution, a bank, a credit union, or an online mortgage company.

A mortgage is a secured loan. The mortgagee agrees to provide the borrower with the money needed to finalize the sale, and, in turn, the borrower consents to repay the principal plus interest. The written agreement gives the lender the legal right to repossess the property if the borrower fails to meet the mortgage terms. The property does not fully belong to the borrower until the entire mortgage is paid off.

Foreclosure

Typically, a mortgage loan is to be paid off in installments, and failing to make the payments results in foreclosure. If it comes to this unfortunate turn of events, the mortgage lender can declare that the entire debt is due to be paid immediately (this is the so-called acceleration clause). Failure to pay the whole debt at once leads to the seizure of the security interest in order to cover the remaining debt.

The process of foreclosure is regulated by state law and can differ depending on where you live. It depends on the terms of the mortgage, too. In most cases, the process includes judicial foreclosure (court proceedings). Alternatively, the mortgagee can be granted the power of sale foreclosure enabling them to sell the property.

To avoid foreclosures, some states regulate acceleration clauses and allow late payments; others use instruments called deeds of trust. The eligibility requirements serve the same purpose. In most cases, the borrower has to prove a reliable and steady income, a decent credit score, and have a debt-to-income ratio of less than 50% before their mortgage loan is approved. Being less of a risk lowers the interest rate too.

In case of any predicament, the borrower should best try to communicate with the mortgagee, and let them know of the financial difficulties and inability to make the mortgage payments. Most mortgage lenders will negotiate a solution. If you hope for the lender to be understanding, you should best not wait until the bills pile up. Act as soon as the problem occurs.

Relevant Mortgage Terminology

The amount of money a borrower can get is determined through an appraisal. The appraised value represents the fair market value of the home and the maximum amount the borrower can receive from the lender. In order to purchase a property, the buyer needs to have enough money for the down payment (a sum you have to pay upfront). Generally, the borrower needs to put this money down before getting the mortgage. The larger the down payment, the lower the monthly payment is. On the other hand, a low down payment calls for private mortgage insurance (PMI) that the borrower has to pay every month.

Amortization refers to how the total borrowed sum is divided over the life of the loan. At first, a substantial chunk of the payments goes toward interest. Later on, more of the payment goes into repaying the loan balance. A mortgage calculator can help you see how your down payment amount affects your monthly installments.

An interest rate represents a percentage that the borrower has to pay to the lender each month as a fee for borrowing money. The interest rates can be fixed or adjustable (variable). As the name suggests, a fixed rate does not change over the length of your mortgage, while a variable rate does.

When a mortgage loan is fully approved, the borrower needs to meet with the lender and a real estate professional to close the loan and assume ownership of the property. At closing, the borrower signs all the required mortgage papers, and pays the down payment and closing costs. It typically takes a few days for the loan to be funded, and then the borrower can finally move into a new home and start living the American dream!