Texas Mortgage- If you are in the market to purchase a property for the first time, you are likely learning a lot of new terminology and concepts. One of the most important things to investigate as a new home buyer is what a mortgage is. Read on to learn more about mortgages in this brief overview.
WHAT IS A MORTGAGE?
A mortgage is a type of loan that helps someone who is in the market to buy a property. Most people cannot make a down payment in cash for a new home, so they use the funds from a mortgage. They use a mortgage loan to finance the purchase of a new home because they can’t pay the full cost upfront—the mortgage helps fill the financial gap between the down payment and the balance of the purchase price.
To get a mortgage, buyers agree to borrow money to use for their home purchase. As borrowers, they enter into a legally binding agreement with a lender that provides a set amount of money to that end. Borrowers agree to pay back the mortgage loan with interest to the lender over a specified time period called the mortgage term; the term is the number of years allotted for repayment of the loan. (A long term usually results in lower monthly payments than a short term; though shorter terms typically save the homebuyer money when it comes to the loan interest). Homebuyers don’t own their homes outright until their mortgages are paid back in full.
ABOUT LENDERS AND BORROWERS
A lender is a financial institution that loans money to an individual in need of financing for a home purchase, and the borrower is the homebuyer. The main types of lenders are mortgage brokers, direct lenders such as banks/credit unions, and secondary market lenders like the well-known Fannie Mae and Freddie Mac.
Lenders and borrowers have specific legal responsibilities. Note that mortgages are “secured” loans; this means that borrowers must put up the home itself as collateral to the lender to get the mortgage. This is done in case borrowers stop making their mortgage payments. In such cases, the lender can foreclose on the home to clear the mortgage debt. (A foreclosure allows the lender to evict the tenants of the property—whether that tenant is the homeowner or someone renting the house.)
DETAILS OF MORTGAGE PAYMENTS
A mortgage payment is the amount of money required to be paid monthly toward the loan balance. Each monthly payment is made up of four major parts: principal, interest, taxes, and insurance. The principal is the balance or total amount remaining to be paid on the loan, after each monthly payment. The interest each month is computed based on the interest rate and loan principal and goes directly to the mortgage lender; as the loan matures, interest decreases (i.e., borrowers pay less interest as the principal decreases). Taxes are collected by the lender and placed in an escrow account until property taxes are due, at which point the taxes are paid from the account on behalf of the borrower. Homeowner’s insurance covers the cost of the home in case of any disaster (e.g., tornado, fire, etc.) that causes property damage. (Most lenders require borrowers to have homeowner’s insurance.)
If you are exploring the real estate market in the Dallas-Fort Worth Metroplex and surrounding suburbs, WEICHERT, REALTORS® – The Harrell Group can help! The experienced real estate team based in Flower Mound is dedicated to making sure their clients understand the ins and outs of buying and selling properties. Contact WEICHERT, REALTORS® – The Harrell Group to speak to a licensed real estate professional.
Written by: Erika Mehlhaff