Mortgages are some of the most common loans in America and around the world, but many prospective homeowners don’t quite know how they work or what they should look for in an ideal mortgage loan contract. Today, let’s take a look at how mortgages work and explain what affects things like mortgage rates, down payment amounts, and more.
What is a Mortgage?
In a nutshell, a mortgage is a homeowner’s loan that allows average American citizens to purchase homes without needing to have a property’s total cost in cash at the time of the purchase. Like other loans, the payment for the house is fronted by a lender.
In exchange, the homeowner or mortgagor pays the lender back for the loan in installments. Also like most other loans, the homeowner pays both a flat rate against the loan principal (or the initial cost of the home) in addition to interest, which is how the lender makes money from offering money to borrowers.
A mortgage loan’s major aspects include:
- The loan amount or principle – the money of the loan
- The interest rate – how much interest you must pay with each billing cycle
- The down payment amount – the initial cash payment made toward the home purchase
- The term – how long the loan is expected to last, displayed in months or years
Who Offers Mortgages?
Many organizations and institutions may offer mortgage loans to borrowers. For example, Mr. Cooper is a private lending institution in the business of providing affordable, accessible homeowners loans to Americans just like yourself.
In many cases, private lenders offer the best mortgage loans with affordable rates, attractive perks, and good terms. Other private lenders include banks, credit unions, and so on.
However, mortgage loans can also be offered by the federal government or Federal Housing Administration (FHA). FHA loans are usually intended for first-time homeowners, for veterans, or for other individuals with special circumstances or needs.
How Does a Mortgage Loan Work?
A mortgage loan, at its core, works just the same as any other personal loan you might take out.
- You find a mortgage lender that offers a mortgage loan that seems attractive to you
- You apply for the mortgage loan and the lender determines whether they will approve you for the loan based on several factors (more on those below)
- If you are approved, the lender gives you the cash you need to buy a property
- With most mortgages, homeowners are required to make a down payment in cash up to a certain percentage of the home’s total cost. For example, if you take out a mortgage for a $300,000 home with a 10% down payment, you’ll need to pay $30,000 cash. Your lender will pay the additional $270,000 required for the house
- Once you’ve bought the home, you pay the lender back for the loan’s term, which typically ranges between 15 and 30 years. You make monthly payments for the duration of the loan term
- Your loan payments are broken down into the principal payment and the interest payment
While you technically own your home after purchasing it with a mortgage, you don’t fully own the property until your mortgage is paid off. Because of this, some mortgage loans are better than others since they can be paid off more quickly, they may have more attractive interest rates, and more.
Choosing the right mortgage loan is a big part of purchasing a house – and it’s another reason why Mr. Cooper is the ideal option for prospective homeowners like yourself.
What Affects Mortgage Rates?
Your mortgage’s interest rate is broadly determined by two factors:
- The current market rates
- The level of risk that the lender projects to lend you the money
The first factor is influenced by a wide range of things, including the broader economic situation and the Prime Rate, which is the interest rate that applies to big institutions like Fannie Mae and Freddie Mac when they borrow from the federal government. Since the Prime Rate affects how much money lending institutions make, it also affects the interest rates they attach to their mortgages and other loans.
The wider housing market can also affect market rates for new mortgage loans. If the market is doing well, lenders may try to decrease interest rates to attract new homeowners. The reverse may be true if the housing market takes a dive.
What Affects Lender Risk?
Lenders always take a risk when giving out money for mortgages. They calculate risk by looking at several major factors that you provide to your lender when you apply for a mortgage, including:
- Your credit score, which broadly determines your creditworthiness. The higher the credit score, the better loan terms you are likely to get
- Your employment history and income, which may indicate how reliably you can pay back your mortgage loan
- Your previous homeownership history
- And more
By comparing both the market conditions and individual risk for a prospective borrower, lenders determine their mortgage rate.
Why Are Lower Mortgage Rates Better?
As a borrower, it’s always better to try for a lower mortgage rate if possible. The lower the mortgage rate, the less extra money you have to pay each month in addition to the principal for your loan.
In addition, a lower mortgage rate means you’ll pay down the principal faster. Since the interest rate is always calculated as a percentage based on the current principal (how much of your initial loan amount is remaining), the faster you pay down the principal, the less interest you pay with each monthly payment period.
How to Qualify for a Mortgage
Qualifying for a mortgage is a big step for many Americans. You can qualify for ideal mortgages with good terms and good rates by:
- Raising your credit score
- Staying employed
- Offering a larger down payment
Offering a larger down payment is often a great way to reduce the interest rate for your mortgage loan, too. Since the lender has to lend you less money if you make a larger down payment, they take less risk for the loan and might be willing to reward you because of it.
Mr. Cooper Can Help You Get the Home of Your Dreams
Ultimately, this breakdown only scratches the surface of what mortgage loans are and what they can mean for your homeownership dreams. Thankfully, lenders like Mr. Cooper are ready and waiting to help you find the perfect financing options for your home purchase. Contact Mr. Cooper today to speak to a representative and see your financing options.