What is a mortgage?

Excellent question, which can be answered simply by referencing Webster’s definition as follows:

: a legal agreement in which a person borrows money to buy property (such as a house) and pays back the money over a period of years

However, being the curious being that you are, you surely want to dive in a bit deeper, so let’s take a look at the etymological roots of the word itself…

late 14c., morgage, “conveyance of property as security for a loan or agreement,” from Old French morgage (13c.), mort gaige, literally “dead pledge” (replaced in modern Frech by hypothèque), from mort “dead” (see mortal (adj.)) + gage “pledge” (see wage (n.)). So called because the deal dies either when the debt is paid or when payment fails. Old French mort is from Vulgar Latin *mortus “dead,” from Latin mortuus, past participle of mori “to die” (see mortal (adj.)).

Continue reading What is a mortgage?

Self-Employed Mortgages

Since mortgages are loans to buy homes, usually (except in the crazy lead up to the 2007-2008 fiasco), banks require proof of income to know that the money they lend is likely to be paid back.  With the craziness of IRS rules and regulations in the United States, proving income based on tax returns for the self-employed borrower can be a little more difficult than for the 9-5 wage earner.

Additionally, most human mortgage underwriters want to see some proven stability in income level before giving the go ahead on the best interest rate mortgages to self-employed borrowers.  Makes sense, doesn’t it?  The higher the risk, the higher the price to the borrower (interest rates are the “price” of borrowing money).

The automated underwriting tools in the mortgage industry today call for different degrees of required income documentation based on a complicated bunch of rules that consider a buyer’s credit history, assets, down payment or loan-to-value ratio and other factors.  So income documentation may sometimes be less stringent if the computers say a borrower is good to go versus a human underwriter reviewing a loan file.

The point is, if you are a self-employed borrower, be prepared to be asked for tax returns, possibly a couple years of bank statements showing deposits, and other documentation that a W2 borrower might not be asked for.  The better your credit and overall financial situation, the more likely you won’t be asked for as much.

Of course, depending on the lending institution you work with, the rules vary.  This is where the advantage of a mortgage broker can come into play, as they can use their market expertise to help you shop for the best deal, per your particular circumstances.

Questions or comments?  Please post below!

Fixed-Rate Mortgages

One of the first things people will say when you mention you start the process of buying a home for the first time is to be sure to get a fixed-rate mortgage.   Why?  What is a fixed-rate mortgage and why do so many people recommend them?  Is it always the best option to select?

Let’s think about some of these questions.  First, what is a fixed-rate mortgage?  Well, let’s start with the definition of a mortgage before we get into the “fixed-rate” aspect of them.   Continue reading Fixed-Rate Mortgages

What is a Reverse Mortgage?

If a mortgage is borrowing money to buy a house slowly over time, then a “reverse” mortgage is selling a house to get money slowly over time.  Make sense?  They can be compared to annuities, because the idea is to pay you a portion of your total value every month (or whatever the agreement says), until the total value has been paid out.  In this case, the total value is your home.

Reverse mortgages are meant for retiring people who want to access the value of  their home while still living in it, until they pass on, and typically require the home to be paid off or have enough equity to make a long-term arrangement possible and profitable for the lender.  Is it of benefit?  That is completely up to those considering using the instrument.  Arguments could be made either way, but here are a few pros and cons.

PROS

  • You get monthly “payments” from the value of your home
  • You typically still get to live in your home until the end of the agreement or your passing, whichever comes first

CONS

  • You sign away your home – be sure to clarify what happens with any residual value that has not been paid to you in the case you pass on (everything is negotiable)
  • You lock in on a monthly payment – over time, the purchasing power of your monthly payment will go down as inflation goes up, so the higher the inflation, the worse it gets for you (again, check options for inflation adjustment with the reverse mortgage company)

 

Mortgage Payment Calculator

Most people’s first question, when it comes to mortgages, is “what’s my monthly payment”?  Unfortunately, many times that is the only question.  Anyway, luckily there are all kinds of resources available to quickly compute a ballpark monthly payment with a few variables like loan amount, interest rate, and length of loan (amortization).  The calculators range from very simple to very detailed, which is nice for those who really want to understand what they are getting themselves into.

http://www.mortgagecalculator.org/
http://www.mlcalc.com/
https://www.drcalculator.com/mortgage/
http://www.calcxml.com/calculators/mortgage-calculator

 

Mortgage Rates

Here are some links where you can get an idea of current mortgage rates. But what do these rates actually reflect? Well, simply put, they reflect the “price” of borrowing money against a home. Yep, the price of money… well technically credit (borrowed money), but you get the idea. Why do you have to pay extra money to get money? The answer to that is a long one and the topic for another post.

https://www.zillow.com/mortgage-rates/
http://www.bankrate.com/compare-rates.aspx
https://www.lendingtree.com/mortgage-rates
http://www.mortgagenewsdaily.com/mortgage_rates/

Any questions? Feel free to comment.