Whatever line of work you’re in, there are probably some fairly common terms you’re used to hearing and saying that an outsider may not know. They may be so basic to you that you can’t even imagine how somebody wouldn’t know what it is, even if they aren’t in your field.
For instance, the word “mortgage” is something real estate agents presume everybody knows. Well, apparently only 49% of people actually know what a mortgage is, according to a recent survey conducted by One Poll!
The survey also found that:
- 45% of the people surveyed said they plan on buying a home within the next three to five years.
- Only 42% of those who were already homeowners used a mortgage to buy their home.
- 55% of Millennials between the ages of 26-40 are far more likely to pay for a house outright with cash, than obtain a mortgage.
- And nearly 20% of those surveyed weren’t sure how much of a down payment they’d need in order to buy a house.
So, if you’re not too sure what a mortgage is, or need a little more info to fill in some blanks, know that you’re not alone.
Simply knowing what a mortgage is could possibly make you a homeowner much more quickly and easily than you might have thought it was to buy a house! It appears that many would-be buyers have not bought a house because they didn’t have the money saved up, or weren’t aware that they could borrow the money they need to buy a house, rather than save up as much money as they needed to buy a house over time.
So let’s get into some basic definitions to get you on your way to buying a home…
What is a mortgage?
A mortgage is a type of loan used to finance the purchase of a house. It’s a legal agreement between a borrower (usually an individual or a couple) and a lender (typically a bank or a financial institution). The borrower receives funds from the lender to buy the property, and in return, the lender holds a lien on the property as collateral until the loan is fully repaid.
How long do you get to repay the loan?
A mortgage is typically broken up into monthly payments that you make over the course of 15 to 30 years. You can pay it off more quickly if you want to, though.
What is included in the monthly payment?
Each payment you make will include some amount that will go toward paying down how much you needed to borrow (the principal), and interest charged against that amount, and will often have the cost of your property taxes and homeowners insurance rolled into the payment as well. This is often referred to as “PITI” — principal, interest, taxes, insurance.
How much are the interest rates?
The interest rate you have to pay depends upon many factors. On a broad level, rates change due to economic conditions and go up and down over time. But whatever the current rates are in general, your own personal credit rating and history will affect how much the interest rate you are charged will be. How much interest you’re being charged could vary from one lender to another, so make sure to get a few offers to compare.
What is a down payment and how much do you need?
Borrowers are typically required to make a down payment. This upfront payment, usually a percentage of the property’s purchase price, reduces the loan amount and demonstrates the borrower’s commitment. Lenders like to see that you have some money tied up in the property because you’re less likely to default on the loan. The amount required varies. Years ago lenders required 20% of the purchase price as a down payment, but now you can find loans that only require as little as 3% or 5% down.
Are there any additional costs?
When obtaining a mortgage, borrowers typically incur various fees and charges, known as closing costs. These may include appraisal fees, attorney fees, title insurance, loan origination fees, and more.
What credit score do you need to qualify for one?
While the better your credit score is the better rate you’ll likely get, you don’t need a perfect credit score in order to qualify for a mortgage. In fact, there are loans available for credit scores as low as 580… although a 620 score is generally considered the standard minimum credit score you should have.
What’s the first step?
A basic understanding of mortgages is really all you need. You don’t need to become an expert, or pass a pop quiz on the above terms. Just contact a mortgage lender and ask them to “pre-approve” you for a mortgage.
They’ll want you to give them some basic information on how much you earn, what your current debts are, how much money you have saved up, and they’ll run your credit to see how that looks. But they’ll quickly be able to tell you how much they’d be willing to lend you to buy a house.
Pro tip: Ask a real estate agent you know and trust for the names and numbers of lenders they trust, because they always have a short list of great mortgage lenders and can recommend the very best fit for you, especially if you need a little more guidance on the process.
The Takeaway:
Mortgages make purchasing a home possible for many people, without having to save up every single penny it takes to buy a house. Yet nearly half of people recently surveyed did not know what a mortgage even was. This suggests that many would-be homeowners are waiting longer than they need to, and are trying to save enough money to buy a house outright, rather than get a mortgage which allows them to pay for a house in monthly installments over the course of 15 to 30 years.
There’s no need to become an expert on what mortgages are, though. Just find a reputable mortgage lender who will walk you through the process and get you on your way to the fun part… finding a home you want to buy!