How Does a Mortgage Work?

La Jolla, CA, Apr 7, 2015—For those new to the real estate process, understanding the inner workings of a mortgage can be a confusing process. “In the simplest terms, a mortgage is a loan that is secured by real property,” says Kevin Fayad, REALTOR® at CENTURY 21 Award. When someone takes out a mortgage, the lender holds title to the home until the loan is completely repaid. If you fail to pay up, the lender has a right to take the property, sell it, and recover the money that is owed.

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So how much mortgage do you need? The amount of a mortgage will vary greatly depending on the down payment you make to reduce the amount of money that is needed to finance the home. You may put as much money down as you like, or you can sometimes pay as little as 3 to 5 percent of the purchase price, or sometimes nothing at all.

“The more you put down, the more you reduce the amount that is financed, thereby lowering your monthly payment,” says Kevin.

The monthly payment consists of both principal and interest but also typically includes additional amounts to cover property taxes and insurance – specifically hazard insurance and private mortgage insurance, the latter of which is required for down payments less than 20 percent of the purchase price.

If you're wondering how much home you can afford, you can turn to your real estate agent, who has information on lender loan requirements and will be able to calculate a rough monthly figure you can afford based on the maximum monthly payment for the loan, taxes, insurance, and any type of maintenance fees. This pre-purchase evaluation can save you a lot of time spent looking at properties you cannot afford.

“Lenders also routinely calculate what you can afford and can pre-qualify you for a loan even before you begin your home search,” says Kevin. “This way, you know exactly how much you can afford to buy.”

Lenders generally stipulate that you spend no more than 28 percent of your gross monthly income on a mortgage payment or 36 percent on total debts.

“Ultimately, the price you can afford to pay for a home will also depend on other factors besides your gross income and outstanding debts,” Kevin explains. They include the amount of cash you have available for the down payment, your credit history, current interest rates, closing costs and cash reserves required by the lender, and the type of mortgage you select.

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For additional information on mortgages, please contact  Kevin Fayad at kevinfayad@century21award.com, (619) 925-4445, or www.century21award.com/agents/KevinFayad

For more real estate information, please contact CENTURY 21 Award at info@century21award.com, (800) 293-1657, or CENTURY 21 Award.