What is a Mortgage?

August 1, 2019 — 4 min read

Mortgage (n.): a loan used to purchase or refinance a home. Secured by the collateral of real estate property, a mortgage obligates the borrower to pay back the loan with a predetermined set of payments.

As a first-time homebuyer, you may find it the most beneficial to search for a real estate agent first. Your agent will have strong relationships with lenders in your area and be able to give you a solid recommendation. When it comes time to buy, you'll need a mortgage to help purchase the home. This is where having a trusted lender is important.

A well-educated lender will help you find the best rate for your current financial situation. Once you buy the home, you will make regular monthly payments toward the loan until you pay it off. The payments will include several different costs, such as:

Principal

The principal is the part of the loan's balance still owed to the lender, or the loan amount borrowed from the lender, excluding interest. Essentially, your original loan, minus the payments you've made against that balance. You may have the opportunity to refinance your loan at a lower rate later on down the road, or you may even pay off the loan early.

Interest

Interest on a loan is a fee that a lender charges for allowing you to borrow their money for a specific length of time. Your lender will determine your interest rate from a variety of factors, including:

Your credit score
Property type and location
Loan term
Interest rate type (fixed or adjustable)
Home price and loan amount
Down payment
Type of loan program

As of July 31, 2019, the Federal Reservedropped interest rates a quarter-point.

Homeowners Insurance

This form of property insurance covers losses and damages to an individual's house and to assets in the home. Thankfully, homeowner's insurance also provides liability coverage against accidents in the home or on the property.

Mortgage Insurance

Mortgage Insurance (MI) is a policy that lowers the risk of making a loan to applicants who are putting down less than 20% of the purchase price. MI is required on conventional loans with a down payment less than 20% and is also typically required on FHA and USDA* loans.

With a conventional loan, your lender will arrange for MI with a private company. Private Mortgage Insurance (PMI) rates will vary based on down payment amount and credit score. Generally speaking, PMI is cheaper than FHA MI for consumers with good credit. Most often, PMI is paid monthly. It's also possible to get a PMI policy where the entire amount of the MI is paid up-front as part of the closing costs or financed into the loan amount.

The Purchase Loan Process

Unless you're refinancing a current loan, your loan timeline will typically look like the following steps.

Application

First, your financial profile will be thoroughly reviewed by the lender, followed by a discussion of your options. The lender will then determine the loan program that best suits your financial needs.

Approval

Upon receipt of your documentation, your credit is assessed for approval. At PRM, we don't believe in pre-qualifications. Our skilled, in-house underwriters work hard to get you approved from the start of the process. Therefore, this has the potential to increase your authority as a buyer.

Property

Once you've been approved, your lender will open an escrow account and request a title report. After all inspections, contingencies, and repairs have been satisfied, the lender will then order an appraisal and homeowners insurance binder.

Documents

When all conditions are received and cleared by the underwriter, your loan documents will be prepared and delivered to the title company.

Signing

After the previous steps are completed, your signing appointment is then set.

Funding

The final step of the loan process is the actual funding. Once your loan documents are reviewed, funds will be released, and your loan will be recorded.

Are you ready to be a homeowner? Contact a Mortgage Advisor today to get the process started.