How does a mortgage work?
A mortgage works by allowing a borrower to purchase a piece of real estate by borrowing money from a lender, with the property serving as collateral for the loan. The borrower then makes regular payments to the lender, which typically include both interest and principal, until the loan is fully repaid. The interest rate, length of the loan, and other terms of the mortgage can vary depending on the lender and the borrower's creditworthiness.
Generally, the process of obtaining a mortgage includes the following steps:
- Applying for a mortgage: Borrower needs to submit an application to the lender, which includes financial and personal information.
- Getting pre-approved: Lender will check the borrower's credit score, income and debts to determine how much the borrower can afford to borrow.
- Finding a property: Once the borrower has been pre-approved, they can start looking for a property to purchase.
- Appraisal and inspection: Lender will have the property appraised to ensure that it is worth the purchase price and a home inspector will be hired to check for any issues.
- Closing: Once the lender has approved the loan, the borrower can close on the property. This is when the borrower will pay any closing costs and the lender will disburse the loan funds.
- Repayment: Borrower will need to make regular payments to the lender, which will include both interest and principal, until the loan is fully repaid.
It's important to note that mortgage can come in different forms, like fixed-rate mortgages, adjustable-rate mortgages, and government-backed mortgages (FHA, VA, USDA).
Check out our home buying guide and refinance guide for more details.