What is a Mortgage?

Mortgage is a key component of any property investment. No matter the wealth or region, you’re gonna have to confront the facts about mortgage, the amount you’ll have to pay in total, and the interest. To pick the right mortgage you will need to be informed about everything there is to know about mortgages. All this and more below. If you want to save money on your mortgage, and you already know about saving money on real estate taxes, you should understsand it in detail. We begin with the definition of mortgage.

Mortgage Definition & Explanation

A mortgage is a type of loan. That means it is a sum of money which a lender pays on behalf of a borrower. A mortgage is a loan which is used to pay off property. The borrower is required to pay the money which they borrowed back, but not as a lump sum, but rather in rates. This means that e.g. as opposed to paying 1 mil. in one transaction, the borrower can pay 10.000 every month for 100 months. On top of this though, the lender typically requires interest, which is a percentage of the total loan which the borrower must pay on top of the rates.

What are All the Things you Pay in a Mortgage?

In a mortgage you pay more than just the amount which you borrowed. You pay additional fees at the point of closing the mortgage, you may have to pay a private mortgage insurance, and you will have to pay mortgage interest. The amounts you pay on these usually follow a formula where the more you pay at the closing of the sale, i.e. the more you pay up front on your mortgage, the less you pay later on or annually.

These are just some of the additional costs you pay when closing the purchase of property. This and many more closing costs for house purchases are detailed in our article on

• All additional Costs and Hidden Fees when Buying a House

The Loan – Ending a Mortgage

Of course, you are required to pay back the amount which you borrowed. If you borrow $500.000, you will need to pay this back in full at the conclusion of your mortgage. This is the simplest and most overseeable part of your mortgage, as well as the most substantial sum.

Mortgage Closing Costs – Upfront Payments

These are costs which must be paid up front when closing the mortgage. They pay for things like title insurance, application fees, etc. Mortgage closing costs are of course paid by the buyer of a property at the point at which the property is purchased. There’s too many to list, and these vary and depend on many things, but below some of the common ones.

• Loan origination fee: up to 1% of total loan
• Escrow fees: $350 – $1,000 but can be much more
• Appraisal: $500-$1,000 but can be much more
• Prepaid taxes and insurance: $1,000-$4,500 but can be much more

These typically range around 2%-5% of the total loan amount. So for a $750.000 loan you can pay an additional $37.500 in mortgage closing fees. They should not be confused with purchase closing costs, such as the taxes you pay when buying a house.

Discount Points: How to Reduce your Mortgage

Discount points are points which you pay at the beginning of your loan. The more you pay here, the more discount you receive on your mortgage. If you ‘buy’ 2 discount points, you receive a discount of 2% on your mortgage.

Mortgage Interest Lowest Mortgage Interest

Interest is a price which you pay for the service and risk of someone loaning you money. Mortgage interest rates are expressed as annual payments, and are e.g. 5%. That means that every year you will pay an additional 5% of the total loan amount to the mortgage lender.

Our article covers everything you need to know about the topic

• Mortgage Interest – How Countries Compare

Who is the Lender for a Mortgage?

Mortgages are most often loaned by independent mortgage companies. That means organisations who are specialized in lending mortgages. Although financial institution such as a bank or credit unions. In the USA, banks make up 32.4% of mortgages, credit unions make up 8.8%, with mortgage companies making up 54.4% of the market. These are not all the types of lenders though. Below is a list of all types of lenders in the USA.

What’s Better, Mortgage Companies or Banks?

It’s not difficult to save on real estate taxes generally, but you don’t want to spend more than necessary on your mortgage. Typically mortgage companies (or mortgage lenders) are more flexible. That means they can customize your loan, close your loan faster, and more open to negotiation. They also, because they are specialized in loans, typically have more expertise.

• Mortgage companies (e.g. Quicken Loans)
• Banks (e.g. Wells Fargo)
• Savings associations/loan associations (e.g. Mortgage Bankers Association)
• Online lenders (e.g. GuaranteedRate)
• Credit unions (e.g. Connexus)
• Private individuals (e.g. Family Friend)

What are the Most Popular Lenders?

The top lenders in the USA are Quicken Loans, United Wholesale Mortgage, and Wells Fargo. You can see quickly that specialized mortgage lending companies are the most popular choice at the moment. Here a list of the most used lenders in the USA for mortgages.

1. Quicken Loans – 541,000 loans
2. United Wholesale Mortgage – 339,000 loans
3. Wells Fargo – 232,000 loans
4. JPMorgan Chase – 186,000 loans
5. Fairway Independent Mortgage – 147,000 loans
6. LoanDepot – 146,000 loans
7. Caliber Home Loans – 136,000 loans
8. Bank of America – 134,000 loans
9. Freedom Mortgage – 110,000 loans
10. U.S. Bank – 94,000 loans

Should You use a Mortgage Broker?

What are the advantages of mortgage broker versus a direct lender? A direct lender is an entity (e.g. a bank or credit union) which provides you funds, and to which you in turn pay interest. A mortgage broker is a middle man who is an expert in finding the best mortgage loan. In other words, a mortgage broker takes care of contacting and researching a direct lender.

• Direct Lender: Banks, Credit Unions, etc.
• Mortgage Broker: Middle man who finds the best deal

Mortgage brokers are advantageous if you have difficulties finding a loan. This can be down to low credit scores, or an income which makes lending to you unattractive. Mortgage brokers also often have access to mortgage lending programs unavailable to the typical citizen. Though you will have to pay an extra fee of course to pay the broker for their services.

• Brokers good for low credit scores or low income

Direct lenders such as banks are advantageous because you cut out a middle man. In this case you only have to pay a commission fee to the loan officer (the individual overseeing your loan at the institution). This also has the advantage that the broker is not acting in his own interest, e.g. choosing the institution which pays the highest broker fees.

• Direct Lenders allow to avoid broker fees

What are the Different Types of Mortgages?

There are a few different types of mortgage loans. These differ on three important variables. In other words when shopping for a mortgage loan, you must decide beforehand in which category you fall for each of the following three variables.

Type of Loan: Conforming vs. Non-Conforming Loans

The U.S. government has set certain guidelines delineating ‘conforming’ and ‘non-conforming’ loans. These loans differ in the amount which you can borrow. This limit (as of 2020) is $510.000. That means when you receive a loan for more than this amount, you are receiving a non-conforming loan. Non-conforming loans have worse interest rates and fees than conforming loans. Within non-conforming loans the most popular is the ‘jumbo loan’.

Type of Loan: Fixed Rate vs. Adjustable Rate

Fixed-rate loans and adjustable rate loans (also called adjustable rate mortgages) differ in the variability of interest rate, as the name states. That means fixed-rate loans incur the same interest over the whole period of the loan, while adjustable rate loans incur a rate which is set to change across the lifespan of the loan.

The first, fixed rate loans are attractive because there is safety. The interest rate will not change, and therefore budgeting and planning is easy. Typically fixed rate loans are more expensive at the outset than adjustable rates. Additionally, fixed rate loans are designated by time period. The most popular time frame is a 15-year fixed rate loan. That means the borrower pays back the loan and the same interest rate over 15 years.

Second, adjustable rate loans, are attractive to start with, because the rates are lower. Yet, because they can change, borrowers can be surprised that the interest rate increases over time. These also usually begin with e.g. 5 years of a fixed rate, after which the rate begins to vary.

• Fixed-rate = Same rate for full term
• Adjustable Rate (ARM) = Variable rate

Type of Loan: Conventional vs. Government Backed

Government backed loans are loans which are insured or guaranteed by the government. Examples are Federal Housing Association (FHA) loans or Veterans Administration (VA) loans. If you have a non-conforming loan it is impossible to receive government backed loans. The main differences between conventional loans and government loans are that conventional loans have stricter requirements (e.g. better credit score and higher income), are insured privately, and the guidelines are more relaxed, meaning less paperwork.

Mortgage Terminology Explained

There are many words unique to the real estate loan market which are not used in every day life, making the understanding of mortgages more complicated for the layman. These words are explained below, with definition and explanation

Escrow – Meaning

An escrow or escrow account is a savings account where funds are placed. This account is managed by your servicer, who deposits a portion of each mortgage payment into your escrow account to cover your estimated property taxes and insurance premiums. Not all mortgages come with escrows.

What is a Mortgage Principal?

Mortgage principal, also called loan principal is the amount outstanding on your loan. In other words, the amount left to be paid from the amount you borrowed. E.g. if you borrowed $400.000, and have paid $320.000, your loan principal is $80.000.

Down Payment – First Mortgage Payment

A down payment is a sort of deposit. It is the money you pay in advance to buy a house. You almost always have to pay a down payment to receive a mortgage. A larger down payment generally means better credit terms and a cheaper monthly payment.

Take for example a 5% down payment on your $1 mil. house. You only pay $50.000 at the point of purchase, but will pay a monthly private mortgage insurance, and likely higher interest rates. You can also receive discount points when paying more on your down payment, which reduces the interest rate. If you pay a 25% down payment, you’ll pay $250.000 at the point of purchase, but you will not have to pay private mortgage insurance, as well as receive a better interest rate.

• Larger down payment = lower interest

Mortgage Term – Length of a Mortgage

This is the period of time in which you pay off your loan. E.g. the fixed rate 15 year loan, has a mortgage term of 15 years. The longer the mortgage term, the higher the interest rates, and the longer the loan will be following you. Yet you will have to pay less each month.

Want to learn more about the many additional, and often hidden costs of buying a home? Our article covers everything you need to know

• All Additional Costs of Buying a Home Explained

Der Beitrag Mortgage Explained Easily – House Financing, How-to, Guide erschien zuerst auf ℄ Real Estates.

Additional Fees When Buying a House?

Everyone knows that you will pay money to another homeowner when you purchase your house, and for a long time as part of your mortgage interest. You will likely be aware that there are some fees that you will pay to a realtor in case you have hired one. Yet there’s many additional fees you can expect on top of that. In general, a rough estimate is that these costs are usually between 3 and 6 percent of the total purchase price of the home.

• Additional 3-6% of total purchase price

That means a $1 mil. home can incur $60.000 additional costs on top of the purchasing price.

$1 mil. House = $60.000 Additional Costs

People like to call all these costs closing costs, yet taken strictly, closing costs are all costs which occur at a point of sale of real estate, which are not the basic value of the real estate. This does not include e.g. furnishings or mortgage insurances though. Below all additional closing costs as well as additional fees which you may incur when buying a home.

All Fees – List

Below we shed some light on what the fees are which a buyer will have to deal with, who pays these, and why these are paid. Here we list the most important ones:

Earnest Money – Real Estate Deposit

The first expense you will incur when buying a home is called “earnest money”. It is a form of downpayment, a deposit paid by a future buyer which demonstrates the seriousness of his or her intentions to purchase a property. It is usually paid to a broker or agent, and held in an escrow account until the purchase is completed. It is later used to pay for the down payment or closing costs.

That is, unless the deal fails and it is found to be your failt. If this is not the case, and the deal falls through for reasons out of the buyer’s control, he or she will be refunded the money. Typical ‘earnest money’ deposits in the USA range from $500 to $2,000.

• Between $500 and $2,000

Down Payment – Beginning Mortgage

Everyone’s heard of down payments, and they’re vital to understand. A down payment is a portion of the total price of the home which you pay at the point of sale. As most people cannot pay the full sum of the real estate at the point of sale. It typically works as follows: an individual pays a downpayment to the seller of a piece of real estate. A financial institution, such as a bank, will pay the seller the remaining amount, and receive scheduled payments from the buyer. These scheduled payments form part of a mortgage, read more in our article

• Mortgage Explained – Easy, How-to, Definition, More

How much is a Down Payment?

In the U.S., the rates vary, but the typical rate is 20%, with 5% or less being rare, but still possible. The higher this percentage is, the less an individual is typically going to borrow from the bank, and therefore the lower the interest rates will be on the money needed to pay back. Additionally, the more that is paid, the lower the amount on which interest is collected. E.g. if the rate is 20%, you pay less if this is 20% of $200.000 than if it is 20% of $800.000.

• 5%-20% of Purchase Price

Taxes you Have to Pay Buying Real Estate

There are a few taxes which you need to pay when purchasing a home. These include mortgage taxes, property taxes, and transfer taxes. These are not universal across states, and need to be regarded as a critical part of the additional costs you pay when buying a home. We have a full article on the matter giving simple details

All Taxes You Have to Pay when Buying a Home

Mortgage Insurance – Real Estate Safety Net

Mortgage insurance, not to be confused with mortgage tax, is an insurance on being able to pay your mortgage. Typically this is only required if you make a down payment less than 20% of the original purchase price. Also called private mortgage insurance or mortgage insurance premium (the same thing, but when you receive a mortgage through the Federal Housing Authority). Additionally, those receiving a loan over the department of veteran affairs are not required to pay mortgage insurance of any kind.

How much is Mortgage Insurance?

The rates of mortgage insurance are typically between 0.55% to 2.25%. This percentage is calculated as a proportion of your loan. For example, a loan totalling 2 mil. with a mortgage insurance rate of 2% will be $40.000. Additionally, these are typically paid annually.

• 0.55% to 2.25% of total Mortgage

Furnishing – Critically Underestimated

Actually putting your furniture is an often underestimated part of buying a new house. Although irrelevant for those merely seeking to spread investments, for home owners, these can be substantial sums. The costs of moving into a new house can be on average up to $35.000. Moving costs on average between $1.100-$5.630 for the average homeowner, and for those buying properties in the millions, this sum is substantially larger. These include a thorough professional cleaning of the new house, hiring movers, which can costs up to 50$/hour adding up to thousands. Then supplies to move such as a blankets, or paint to paint walls, as well as hired painters. The list goes on.

• Up to $35.000

For property investors looking to rent out their property, even more significant costs can be expected. With sums of $10.000 to be expected for an unfurnished house, homebuyers often do not calculate this into their expected costs.

Discount Points: How to Reduce your Mortgage Payment

Discount points are also called mortgage points, upfront points, or just points. These are not mandatory, but if paid offer considerable advantages, given that there is not a low loan rate. The buyer pays a certain amount to the seller, which then enables the buyer to lower the interest rate on their mortgage. These can be used similarly on conventional or government loans. If you invest in one discount point, you are able to reduce your interest rate by 1%.

• 1 discount point = 1% less interest

When to Buy Discount Points

It is advantageous for a buyer to invest in discount points when two factors come true

1. The buyer intends to own the property for a long time, which means that the interest will be paid for a long time. A discount point would then mean leass dollars paid each month, and over many years this would be worth it.
2. If you plan on paying your mortgaeg off in the designated time period or longer. For persons who intend to pay an e.g. 10 year mortgage off in 5 years, a discount point would be worth it.

What is an Escrow Fee?

This is a fee which is paid to the title company, escrow company, attorney, etc. who helped the buyer close the sale. Like most other closing costs, these are a percentage of the sales price. Often teh value of which is split between the buyer and the seller.

This fee goes to the escrow agent who helps you close. It can vary based on the purchase price of the home, but it is paid to the party who handles the closing: the title company, escrow company or an attorney, depending on state law.

Title Search Fee – Paid to Title Company

The title search fee is another closing cost. It pays for the work which the title company (an organisation which typically the buyer has hired) does in ensuring that there are no issues in ownership or past disputes. This is an aspect of closing costs in which it is quite simple to reduce costs by investing time to identify high quality and low-cost companies.

Survey/Appraisal Fees – Land Inspection

You will need to be have an official and registered survey and appraisal of a property for the lender. If an existing survey of the land you wish to purchase cannot be procured, a new survey must be carried out to determine the exact boundaries of the land. These usually cost about $500. For the appraisal, you pay a certified appraiser to determine the value of the house. Most lenders require this, this usually costs between $300 and $400.

• Between $300-$400

Property Tax – Pro Rata at Purchase

Property taxes must be paid pro rata at the point of sale. This means it is included in closing costs. For a full overview about this and other taxes, such as the recording tax (also called recording fee or notarization fee) refer to the full article

• All Taxes you Pay when Buying a Home

Origination Fee/Loan Origination Fee

Part of the mortgage closing costs, this fee covers administrative costs for processing a loan, and is usually 1% of the loan amount. Some lenders do not charge this, and instead have a higher interest rate. It is important to know that, often, these fees can be itemized in your final statement.

• Cost about 1%

Homeowners Insurance – Extra Security for Home

Just like with property taxes, when buying a home, you are required to pay a pro-rated share of the homeowners insurance. That means you need to pay ahead for a given time period. This time period is generally one year. Because you pay the insurance premium, the cost depends on the insurance of the house

• One year Insurance Premium

Attorney Fees – Should I get an Attorney?

These won’t be necessary everywhere, or with every purchase. Some states require an attorney to oversee the purchase of the house, and in some situations the buyer may want an attorney for other reasons. These attorneys take fees of course, and when purchasing a property, you will need to pay them. Attorneys are actually mandatory when buying property in New York.

Title Insurance – Protecting Against Claims

Title insurance is intended to protect both the lender and buyer from claims. These claims may be against the house in the case of the lender, and for the buyer prootection against past contractors making claims.

Lender’s Title Insurance

The lender title insurance is a one time fee paid at time of closing. It is paid to the title company, to protect in the case of an ownership dispute, e.g. when a lien arises that was not identified in the title search. This fee is usually betweeen 0.5 to 1% of the loan amount

• One-time fee, up to 1% of loan amount

Owner’s Title Insurance

This is an optional fee. Although you may come to regret it heavily in the case that someone does challenge the ownership. Therefore, while it is not mandatory, it is done by almost everyone, and highly recommended in any case.

Broker Fees – Commissions for Real Estate Sale

Broker fees are probably the first thing people think of when thinking about closing costs. These are also called agent comissions or real estate commissions. These are often paid by the seller, but are also usually part of the negotiations, and in a sense therefore also paid by the buyer. They are the fees which are paid to the brokers of a real estate purchase. These brokers are usually the listing agent (i.e. the seller’s agent who offers the property) and the buyer’s agent (who finds the property for the buyer, organizes, etc.). The fee is usually between 5-6% of the purchase price, meaning an additional cost of up to $60.000 if you are buying a property worth $1 mil.

• 5-6% of Purchase Price

Der Beitrag All Additional Costs when Buying a Home Explained erschien zuerst auf ℄ Real Estates.