What is a mortgage and why is it important?

A mortgage is your ticket to owning a home without having the full cash upfront. It’s a loan that lets you buy property using borrowed money. You snag the funds you need to buy the place, and in return, you promise to pay that money back over time, with interest. For instance, if you’re eyeing a $300,000 house but only have $60,000, a mortgage covers the remaining $240,000. The lender evaluates your financial situation—credit score, income, and existing debts—to decide if you’re good for it.

What’s the process of getting a mortgage?

1. Pre approval: You kick things off by filling out some basic information about your personal financial situation—your income, credit, and other debts, for example—before you start shopping for a home. Your lender will calculate the amount they could lend you, based on this information, and write you a pre approval letter that you can use when you’re ready to make an offer on a home.
2. House hunting: With pre approval in hand, you hunt for homes within your budget.
3. Offer and acceptance: Find your dream home? Wonderful! But talk to your lender before you make an offer. They’ll be able to refine your offer letter to make it strong and compelling—often, this can mean the difference between winning and losing an offer on a home.
4. Application: If a seller accepts your offer, you’re ready to move into the “real” application. You’ll need to sign some paperwork, share more information about the property, and confirm any remaining details about your financial situation so that your application can be sent to underwriting. Your lender will likely order a home appraisal at this time.
5. Conditional Approval: Now you’ve done your part, and you’re all approved and ready to go, so long as all the other details in the loan check out. It’s up to the underwriter to verify and assess hundreds of little details, and also ensure that the Title on the property and the Appraisal are in good shape. You’ll also probably lock in an interest rate in this timeframe, depending on when you plan to close.
6. Final Approval: Once everything is verified, you’re in “final approval” and ready to prep for the closing.
7. Closing: Seal the deal. You finalize the loan, cover closing costs, and sign the paperwork. For a $350,000 home, closing costs could be 2-5% of the price, covering appraisal fees, title insurance, and other essentials.

What are the key mortgage terms I should know?

Interest Rate: This is the cost of borrowing the principal amount. For example, a 6% rate on a $400,000 loan results in $24,000 in annual interest. Not to be confused with the APR (annual percentage rate), which is the interest rate plus the costs associated with closing such as purchased “points” and “origination fees.” 

Rate Points: 

Down Payment: This is the amount you pay in cash for the house, with the rest covered in the mortgage. Most first time home buyers put 8% down for their home loan. Conventional loans usually require at least 3% down (e.g., for a $400,000 home, that’s $12,000). FHA loans also allow for lower down payments, like 3.5% and also have less strict regulations for DTI and credit scores, making homeownership more accessible. Learn more about the pros and cons of different down payment options. 

Loan Term: This refers to the length of time you have to repay the loan, typically 15 or 30 years. A 30-year term means lower monthly payments but more total interest compared to a 15-year term.

Principal: The initial amount of the loan. For example, if you borrow $400,000, that’s your principal amount.

Monthly Payment: This combines both principal, interest, and associated taxes and fees. For instance, a $400,000 loan at 6% over 30 years results in about $2,398 per month.

Loan Type: The type of mortgage affects your interest rate and overall loan terms. Common types include:

• Conventional Loans: These are not backed by the government and generally offer competitive rates. They may require a higher credit score and down payment compared to FHA loans.
• FHA Loans: Backed by the Federal Housing Administration, these are aimed at borrowers with lower credit scores and smaller down payments. They often come with more flexible credit requirements but may include higher rates and mortgage insurance.
• VA Loans: Offered to veterans and active-duty military members, these loans are backed by the Department of Veterans Affairs and typically offer lower rates with no down payment requirement.
• USDA Loans: These are designed for rural and suburban homebuyers and are backed by the U.S. Department of Agriculture. They often offer low rates and no down payment but come with income and location restrictions.

What is amortization?

Amortization is how you pay off your mortgage over time. Your monthly payment covers both interest and principal. At the start, most of your payment goes toward interest, but as time goes on, more goes toward the loan principal.

Here’s a simplified look at how it works:

• Early Years: In the first few years, you’re mostly paying interest. For example, with a $300,000 mortgage at 6% over 30 years, in the first year, you’ll pay a lot in interest and a smaller amount toward the loan principal.
• Middle Years: By year 5, more of your payment goes toward the principal, and less toward interest.
• Later Years: By year 8, even more of your payment reduces the principal.

Here’s a sample chart showing how much goes toward interest and principal in years 1, 5, and 8 for a $300,000 mortgage at a 6% interest rate:

Year	Payment	Principal Paid	Interest Paid	Remaining Balance
1	$1,798	$4,122	$17,878	$295,878
5	$1,798	$28,598	$14,334	$271,402
8	$1,798	$53,314	$10,093	$246,686

Key Points:

• Year 1: You pay $17,878 in interest and $4,122 toward the principal. The remaining balance is $295,878.
• Year 5: You’ve paid $14,334 in interest and $28,598 toward the principal. The remaining balance is $271,402.
• Year 8: You’ve paid $10,093 in interest and $53,314 toward the principal. The remaining balance is $246,686.

How will a mortgage affect my finances?

 A mortgage impacts your budget and long-term financial plans. It’s crucial to ensure your monthly payments fit comfortably within your budget to avoid financial strain. For instance, a $300,000 loan at a 6% interest rate over 30 years results in a monthly payment of about $1,798. Most people only stay in a home for around 8 years before selling or refinancing, but you should plan to stay in your home as a primary residence for at least 2 years. This helps you avoid capital gains tax, which is a tax on the profit from selling your home if you haven’t lived in it for a minimum of 2 years. Ensure your mortgage fits within your budget and future plans for financial stability.

If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.