A mortgage is a term commonly used in reference to a loan taken out with a property used as collateral.
But let’s first take a step back. Is that actually what a mortgage is? Not quite.
By definition, a mortgage is a document used to tie a loan to property as security, but it isn’t the actual loan document (aka the note) itself. Instead, the mortgage document enables the lender to foreclose upon and take possession of a property in the event that a borrower defaults.
That said, most buyers and real estate professionals use the term mortgage in everyday speech when discussing the loan itself.
A borrower gets funds today in exchange for collateral and a promise to repay.
When a borrower signs their mortgage loan documentation, they agree to place their asset up as collateral along with a promise to replay both the principal and interest of the loan.
The principal is the initial loan amount. For example, if you purchase a property for $500,000, taking out a loan for $400,000 of its value, that $400,000 is your principal. Interest is constantly accruing on the principal based on your interest rate.
Mortgage payments have a principal and interest component. Most loans are fully amortized, meaning the payment amounts remain the same through the term of the loan. However, with each payment, the principal balance slowly decreases, and the payment ratio shifts from mostly interest to the principal. That’s why as the loan term comes to an end, the principal balance reduces quickly.
Borrowers motivated to pay off their principal balance faster should consider making extra or larger payments, which will directly impact their principal balance.
How do you get a mortgage?
Prospective property buyers who are ready to start the mortgage process with a pre-approval letter should reach out to a direct lender like a credit union or bank, or mortgage broker. They will have to support their income, have their credit checked, and provide any necessary documentation required by the lender.
Most loans will also require a property to meet an appraisal contingency, which values the property and ensure that the borrower is not borrowing too much money against the asset. This contingency is designed to protect the lender from lending too much and the borrower from purchasing a property that doesn’t quite meet the value of their purchase price.
This information is verified during an underwriting process before the loan is funded and the sale is closed. During the escrow period, borrowers must work closely with their loan officer to provide any documentation required.
Remember that information is key if you’re looking to get a mortgage. Our team of mortgage brokers has an incredible amount of experience, and we are happy to discuss the process, help you understand how mortgages work, and present your options.
