How Mortgages Work

Let us understand what a mortgage is and its types to be able to know how to deal with it.

Mortgage: An Agreement

Most of the time “mortgage” & “home loan” are interchanged but it is the “mortgage” which is an agreement that makes a home loan possible.


Mortgages Make It Possible to Buy

A real estate property is pricey, we cannot hide that fact. People usually pay a percentage for a certain amount and borrow the remaining balance; however, the banks are there to support and fund the remaining balance but they should feel secured and risks of you not being able to pay them would be low.

Now, banks would make an agreement that they will put the property you are going to purchase as the collateral for your loan so that when you fail to pay your loan, they can hold on to the property and foreclose it.

Loans More Affordable:

By this process, borrowers can get great benefits. This way, the borrower can assure the lender that risks will be reduced and the lender can offer lower interest rates.

Types of Mortgages

The best way to do is to understand a mortgage and know its types so that you can pick the right kind for your advantage.


This loan says it all, you need to just pay the interest and not the loaned amount. These loans can make sense in certain short-term situations; however, this will not be a good one for homeowners who wish to build.


This kind of loan allows you to change out one mortgage for another once you find a better deal. Different type of loans for payment is fine.


 provide income to homeowners (generally over the age of 62) who have significant equity in their homes. Retirees sometimes use a reverse mortgage to help them financially or to get lump sums of cash out of homes that they paid off way back.


This is the simplest type of loan. This is paying the exact same payment for the whole loan term, meaning, you will pay a fixed a month every month until you pay off the debt. The key here is to pay the debt shorter than the term to avoid longer interests which makes a purchase more expensive than it should be.


This loan is the same with standard ones. Interests may shoot up or down in the future. Payments every month might change too but it usually changes after a few years.


This is also known as a home equity loan, — they’re for borrowing against a property you already own or simply like cashing out your home equity.


This loan requires you to pay huge amounts or “balloon” or bulk. This works for temporary financing but it’s risky when you don’t have enough funds to pay when it’s due.



How to Get a Home Loan

Mainly, you need to apply for a loan to b able to borrow money. Heads up, home loans are tedious because they require more documentation than other kinds of loans so be prepared for its process.

Credit and Income:

These two are the main factors in applying for a loan. These will determine your loan approval. Before applying for a possible home loan, you need to assess your credit and income to have a good shot for a home loan. For credits, it is important to have a good credit score to be able to get a better chance of loan approval.

Documentation and Ratios:

On the lenders’ side, documentations are vital because this will help them identify your capabilities in paying (get your Form W-2, your most recent tax return, and other documents handy so that you can submit them to your lender).

Debt to Income Ratio:

Lenders will look at your existing debts to make sure you have enough income to pay off your loans — including the new one you’re applying for.


This is a preliminary process where lenders evaluate your credit information and your income. This doesn’t necessarily mean that you’re approved — especially not for a particular property — but it is helpful information, and a preapproval letter can help strengthen your offer.

How Much to Borrow:

The decision falls on you to decide how much to spend on a certain property, what type of loan to use, and how large of a down payment you want to make. All of those factors determine how much you’ll pay every month, and how much interest you’ll pay over the life of your loan (smaller loans lead to smaller monthly payments and smaller interest charges).  

Where to Borrow

Mortgage brokers

Mortgage brokers have access to numerous banks and other sources of financing, they can refer you to a lender that offers the best loan for your budget and capabilities, however, they have a certain fee when you ask them for their services.

Banks and credit unions

These are also a source of loans to borrowers. Savings and checking account must be invested to be able to check your records. These institutions earn revenue from origination fees, interest, and other closing costs.

Online lenders

It also works as a mortgage broker but it is online and this is more convenient since you don’t need to go anywhere. Just be careful with the companies you may encounter online.

Loan Programs

These programs are offered by local organizations or even the government. In these programs, being approved is easier and offers are much more affordable too.

Government loan 

Among the programs, Government loans are the most giving are among the most generous and here are the popular types of loans, the government offer.

FHA Loans:

Loans insured by the Federal Housing Administration (FHA) are known for homebuyers who can afford a small down payment. It’s possible to buy with as little as 3.5 percent down, and they’re relatively easy to qualify for.


VA Loans:

Veterans, Servicemembers, and eligible spouses can buy a home with a loan These loans allow you to borrow with no requirement for mortgage insurance and no down payment (in some cases). Loans are assumable meaning other people may continue paying if they will qualify.

First-Time Homebuyer programs

4 Ways to Save Money

Home loans are totally expensive, so savings even a little money for would go a long way in terms of savings.

1. Shop Around

Check and expand your options, this will totally help you in finding the best deals. Don’t just stick to one offer, you might miss the better one.

2. Watch the Rate

Be mindful of your loan’s interest rates, the bigger the loan, the higher the interest, so just be careful and see to it that you watch the rate.

3. Pay Attention to Mortgage Insurance

This is definitely for the lenders, this will protect them from people who cannot continue paying so that they can recover their funds whatever happens. Find alternative ways on how you can get rid of mortgage insurance, for an example in FHA loans, unless you do a refinance you won’t get rid of this.

4. Manage Closing Costs

A lot of expenses will come your way when getting a home loan, application fees, origination fees, appraisal costs, credit check fees, etc. Some lenders charge lower than the other and vice versa, however, you’ll still be paying one way or the other.