Mortgage 101

Mortgages are types of loans that are used to buy homes, apartments, and other types of real estate. Banks typically lend you up to 80% of the property’s cost, while you need to cover the rest as a down payment. There are, however, options for those who can’t afford paying 20% of the value. In return, you agree to pay the money back to the bank over a specified amount of time, most often 20-30 years. The property in that case serves as a collateral to secure the loan.

Depending on the mortgage, you’ll agree to be paying off in a series of regular payments which are divided into principal and interest

What I need to know? 🧐

There are four terms you need to know to understand how your mortgage works:

• Down payment - the amount you pay out of your own savings, which can range from 5% to 20% of the property’s value.
• Loan amount - the amount you borrow from the bank
• Loan term - the amount of time you have to pay back your mortgage
• Interest rate - determines the amount it costs you to borrow from the bank; expressed as a percentage of the borrowed amount

Have a look at this example 🔽

• Home purchase price: $500,000
• Down payment: $50,000
• Loan amount: $450,000
• Loan term: 30 years
• Interest rate: 3% (fixed)
• Monthly payment (inc. interest): $1,897
• Total interest paid: $232,920

What’s the difference between a mortgage and personal loan? ⚠️

1. Purpose. Mortgage is used only to purchase real estate.
2. Flexibility. You have some control over e.g. the loan term, or the amount you want to pay upfront.
3. Extra checks required. There is more documentation required for a mortgage to be approved since the amount is often significantly higher.
4. You don’t see the money. The whole mortgage amount will be paid directly to the home seller instead of your personal account.

Am I eligible for the mortgage?

There are different loan sources, ranging from conventional loans offered by banks, FHA loans backed by the Federal Housing Administration, VA loans offered by the Department of Veterans Affairs, or USDA loans backed by the U.S. Department of Agriculture. They all might have slightly different requirements, but they will be mostly interested in:

• Credit score - usually the minimum required is around 580.
• Debt-to-income ratio - recommended is 10% or less.
• Down payment - the more you can pay upfront, the better terms you might get, but the minimum required is often as low as 0% 🎉
• Closing costs - all the additional fees that you might be charged, including administration fees, ownership transfer, etc.

Why you should consider taking a mortgage? 🏡

Real estate is always considered as an investment towards your future. You might be better off paying towards your mortgage rather than paying someone else for rent. Consider mortgage payment as buying a piece of land for yourself.

Make sure you compare different lenders to get the lowest rate and best mortgage terms. You’re committing yourself to a long relationship with the financial institution so make sure you choose the right one!

Finally, you can use a Mortgage calculator to see what the monthly payment would be on your dream house ⚡️.

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