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Mortgages 101

Mortgages 101

Mortgages 101

If you know anything about real estate, you have definitely heard the word mortgage thrown around. People talk about their mortgage payments or what the interest rates are for mortgages these days. Virtually anyone who wants to purchase real estate will have to contend with a mortgage, so it’s important to understand what they are and how they work.

We’ll look at what mortgages are, things to consider when applying, how to get a mortgage, and how loans and payments work. Let’s dive into the basics!

What is a Mortgage?

Starting with the basics: what is a mortgage? A mortgage is a type of loan that is used to buy a real estate asset, whether that is land, a house, an apartment, or commercial real estate. It is given a different name then just “loan” because it is a unique type of loan with its own rules and regulations. It is also generally the largest personal loan someone could have. As you become an investor, you’ll look for creative ways to fund your deals outside of a traditional loan.

Typically, someone who is purchasing real estate will pay a down payment on their home, anywhere between 5-20% of the total cost of the home. The average down payment for a house is around 12% in recent years. After the down payment is made, they then borrow the rest of the money from a bank, credit union or other financial institution in monthly installments, which comprise of the mortgage payment and interest on the loan.

Things to Consider When Applying

To receive a loan for real estate, owners have to be approved by a bank or other lender. Since it’s a lot of money, the lender needs to ensure that the owner can actually make all the payments on their mortgage. So, there are a few things to consider when applying. Consider these questions:

  • Are you ready to be a homeowner? There are additional responsibilities required when you own a home, including repairs and maintenance.
  • Do you have a stable income and job? Mortgage payments need to be paid monthly, so it is important to ensure you have adequate cashflow.
  • Is your credit good? The bank will check to make sure you have a history of paying your loans.
  • Are you planning on this being an investment property? You’ll have to provide additional information for that when considering your investment strategy and ROI.
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Banks Vs. Credit Unions

Most people will get a mortgage from a bank or a credit union. The main difference between the two institutions is that banks are for-profit companies whereas credit unions are non-profit organizations owned by the members. Typically, banks offer a wider range of services, but credit unions may have more consumer-friendly products as they are not looking only to make profit themselves. Local community banks or credit unions can be very competitive depending on your overall investment needs.

When considering a bank or credit union to apply for a mortgage, look at these considerations:

  • Credit unions are usually more loan-friendly for people with poor credit.
  • Credit unions usually offer lower interest rates.
  • Credit unions can offer more personalization for their members.
  • Banks have better financing options and more money available for loans.
  • Banks are covered by the Federal Deposit Insurance Corporation (FDIC) and so they are federally regulated.
  • Banks are more accessible with more branches and better technology.

There are pros and cons to both, so make sure to ask around at various institutions to learn more about what option is best for you to get a mortgage for your needs.

How Payments are Calculated

Mortgage payments are comprised of a few pieces: your principal, the monthly interests, and other expenses like insurance and property taxes.

Take a home that costs $400,000 to purchase. The owners decide to put down a 10% down payment of $40,000. The remaining $360,000 is the principal loan. The owners have agreed to a fixed-rate mortgage for 30 years at 3% interest. Using a simple mortgage calculator, the estimated monthly payment is $1,517.77.

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Remember that there are a number of factors that determine mortgage payments including how much you are approved for, interest rates, points, the cost of the home, and your own assessment as a borrower. It’s important to work with professionals and gather all your information before diving into a home. There is a lot more to learn and strategies you can learn with investment properties, be sure to check out that content within the Club.

Areas of Review

Takeaway

Big picture takeaway points

  1. A mortgage is just another type of loan but is used to buy real estate.
  2. There are options for mortgages, including where to get the loan.
  3. Banks and credit unions are not the same.

Reflection

Self-reflection questions to think more about the content

  1. Could I qualify for a traditional mortgage, or should I consider using a credit union or another lending institution?
  2. Am I looking only for investment properties or for my personal property as well? This will affect my down payment.
  3. Is a mortgage the right choice for me?

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