Most of life consists of stages—you get to do things in one stage that you didn’t do in another. Even if the current stage is great, you can still feel excitement and anticipation for moving on. And if you’re on the brink of a transition from renter to homeowner, you’ve come to the right place. While your apartment or rental home has been a good fit for a season, you’re ready to take your place in the ranks of homeowners.
But the process of moving from renter to homeowner might look like one big question mark from where you sit. You know you want to buy a home. What you don’t know is exactly how to do it. But you do think a mortgage will be part of the picture.
Understandably, the last thing you want to do is have to put the whole rest of your life on hold to become an expert on mortgages. No worries. You don’t have to major in finance or be an MBA just to get started on the road to homeownership.
Let’s introduce you to this one element of your homeownership roadmap—your mortgage. And getting introduced to it won’t even take your entire lunch break. Consider this a quick on-ramp to get you started on understanding the home buying process. It’ll be fast and painless. Less than 10 minutes.
We’re breaking today’s information down three ways. Start with the first section (pretty obvious place to start, we know). Then once you have a little bit of a baseline, section two will dig in just a little more. Finally, there’s section three.
Sections two and three are optional. (Okay, let’s be honest, everything here is optional—we can’t force you to read this article. You’re here because you want to be—mostly). Actually, section three is for the future mortgage nerds among us. If you just can’t get enough mortgage info to feed your inner financial beast, keep on till you hit section three.
1 – The basics
Let’s start out with the basics. It’s pretty simple—houses are expensive. Most of us don’t sit around with $100,000+ wasting away in our bank accounts. That is unless you’re the rising star of a Silicon Valley startup or the scion of a wealthy family from way back. So chances are, you don’t have enough cash hanging around to buy a house out-of-hand.
That’s where a mortgage comes in. If you’ve been financing your car for the last few years, you might know a thing or two about how a loan works. And that’s great because the idea behind a mortgage is kind of similar.
With your car, maybe you didn’t have enough cash to buy it outright. So you got a car loan to help you out. Thus, you pay for the car on a monthly basis over a period of time. Eventually, you can pay it all off. Then, perhaps you just bask in the enjoyment of owning your own wheels with no payments (well, except paying for things like insurance and upkeep).
What a mortgage is
We can pull a valuable point from the car illustration here. When you can’t afford something, you find someone who will help you. Someone who has a lot of available money. (And no, we’re not talking about that extremely distant uncle who is rumored to be a millionaire).
Actually, we’re talking about a person or group that provides money as their job. It’s what they do for a living. Enter lenders. Think about what banks are known for—having a lot of money. When you need access to money to purchase your first home, chances are you’ll want the assistance of a bank or other mortgage lender.
They connect you with the money. In fact, they can provide the lion’s share of what you’ll need to buy a house (though maybe not quite the whole amount as you’ll see later).
Money, money everywhere
Of course, this doesn’t mean banks and lenders are just handing out free money. If they were, everyone you know would be lining up for a handout (including you). And they’re not offering to help you out financially out of the sheer goodness of their heart, either. Actually, they doing this because what’s good for you is also good for them.
For one thing, it’s good for them because eventually, they get their money back (ideally, anyhow). For another thing, it’s good for them because they get the original money back and then some.
Let’s make this a little easier to visualize
There’s nothing like a sample scenario to draw you into the idea here. Let’s say there’s a young couple about to buy their first house—we’ll call them Jon and Katelyn. They have a few thousand dollars saved in the bank. But it’s nothing close to the amount they need. They’re estimating that the type of house they want in a location they like will probably cost around $150,000.
So Jon and Katelyn decide to get a mortgage. Here’s how it works. The pair connects with a mortgage lender who collects information and documentation from them. The lender needs to figure out if Jon and Katelyn should be approved for a loan. If they are approved, the lender helps them out by providing them with money to buy their house.
By now, you’re sincerely curious why a lender would give money to someone he doesn’t even know. You could understand if Jon and Katelyn’s loving parents wanted to give them money for a house. That makes some sense. But a random banker or mortgage lender? Why?
Good for everybody
Here’s where everything clicks into place. The money that the bank can provide to Jon and Katelyn is not a gift—it’s a mortgage. And unlike a gift, the money in a mortgage situation will be paid back. That’s the reason the bank can do what it does—it’s going to get its money back.
But the bank doesn’t just get back the amount it gave out. It gets back more than that. So in the case of Jon and Katelyn, when the two of them pay back what the bank lent them, there are two things going on. For one thing, when they pay back the money the bank provided for that $150,000 home, that’s called the principal. (You can learn a little more about the principal of a loan here).
However, John and Katelyn pay the bank extra, too. Think of this almost like a “thank you” for the bank’s letting them use that money for a long time. The extra that the couple pays back—that’s called interest. And that’s a big part of what makes the whole situation worth it for the lender. It’s payment to the bank for helping the homebuyers out.
It takes place over time
Still, when we talk about paying back the mortgage lender, it’s good to note that it’s not usually something that you just do all at once on some distant future day. You don’t walk into the bank with and an enormous wad of money (or a huge check) and just square things off between you.
Instead, the homebuyer who took out the mortgage will pay it back over time. The exact length of time could vary, but 30 years is a common length. This is why you may have heard the term “30-year mortgage.” Often, homebuyers will pay back their lender monthly. Sometimes though, you could pay every two weeks.
How do you get a mortgage?
To start your home buying journey, it’s a good idea to get preapproved for a mortgage. We suggest you do this before you start seriously looking at houses you might want to buy. That’s because people selling their homes want to be sure that you actually can buy their house. And if a mortgage company has pre-approved you for a loan, that’s like a stamp of approval.
It’s almost as if the lender is saying, Yes, these people are going to be able to get a loan.
Heading into a home buying situation without pre-approval could land you as the underdog. If a buyer has another offer on their home in addition to yours, yours could have less bargaining power if you’re not pre-approved.
Give and take
Here’s another thing to know about getting your loan. Remember how we said the lender would provide the lion’s share of what you need? Yes, getting a mortgage does mean the lender will be providing you with money. But, you’ll need to bring some money to the table on your end, too.
And that’s what a down payment is. A down payment is the money that you bring into the homebuying situation. And usually, it’s a percentage of your home’s cost. So while the lender’s help will pay a large share of the home’s price, your down payment will chip in, too. Check out more about your home’s down payment.
2 – Digging a little deeper
Now, let’s explore your home buying process a little further. Here are some other things to think about now that you have some basics under your belt. Anyone have help from their parents to buy their first car? Okay, then you may already know a little about co-signing on a loan.
Co-signing can be part of the mortgage situation. Someone who co-signs on your mortgage is committing to the lender that if you don’t pay the money back, they will. If a lender is a little uncomfortable giving a mortgage to someone, having another party co-sign could make the situation better. That way, the bank knows that there’s a Plan B if your own attempts to pay fall through. It’s like a safety net for the bank.
Equity is another part of the mortgage experience. Once you get your mortgage and buy your home, you keep on living your life. And you pay that mortgage back as you go. Now we hit the nice part. As you pay off more and more of your mortgage, more and more of the house belongs to you.
It’s almost as though part of your house becomes more yours than it was before. You’ve paid off part of your loan; you have a greater stake in part of your house—that means you’ve built home equity. Dive a little deeper into home equity if you want to know more.
3 – Extra info for the nerds
For those of you who feel an irresistible urge to know more about mortgages, you might be thinking we’ve only scratched the surface. And you’d be right. But a bird’s eye view can sometimes be a great way to start. Still, there are lots of directions to go from here to satisfy your curiosity. There’s plenty more to know about mortgages.
Let’s start with amortization. For one thing, because it’s a fascinating word—the kind of word that makes you feel intelligent just because you know it exists and what it means. Here’s a definition to start us off, thanks to Investopedia.
Think of your monthly mortgage payment as a chunk of money with two ingredients—principal payment and interest payment. Early on in the life of your mortgage, the money chunk will be made up of more interest payment than principal payment. More money goes to pay off the interest, less money is put toward the principal of the loan.
But as you get into the mortgage term, that changes. And as you near the end of your mortgage’s lifespan, tables will be turned. Your payment chunk will be made up of more principal payment and less interest payment. Intrigued? Head over to What is Mortgage Amortization? to pick up a little more information.
Mortgages are great (most of the time)
Of course, if you need a home but you don’t have all the money the buyer is asking for, you can see the advantage of a mortgage. However, mortgages aren’t always blue sky and sunshine. And when it comes to larger economic picture in the United States, mortgages haven’t always made the news for good reasons.
Enter the 2008 financial crisis. Maybe you’ve heard it mentioned in the news or even in pop culture—say, the movie The Big Short. Let’s not bore you with all the details. But suffice it to say, the 2008 financial crisis had to do in part, with mortgages—especially subprime mortgages. And it went south in a very big way.
Feel smart next time people mention the Fed
You know how everyone is always making a fuss about whether the Fed will raise interest rates? Well, the Fed is the Federal Reserve. They’re responsible in a big way for setting the monetary policy for the United States.
And that means they affect mortgages. To find out how, head to How the Federal Reserve Affects Mortgage Rates. Then, next time you see a news headline about what the Fed is or isn’t going to do, you’ll know a little bit about why they’re important and how they could impact you.
Get started with your mortgage
Now that you know a little about how a mortgage could factor into your homebuying journey, the next stop could be getting started on one yourself. And you can begin now with our online pre-approval process.