Mortgage 101: How to Understand the Mortgage Process

When buying a home, know what to expect so you can move through the mortgage process quickly.

It’s fun to dream about a home, whether you’re scrolling online or driving around your favorite neighborhood. When thinking about your next steps, understanding the mortgage process is a key part. It might seem overwhelming, but you’re not alone, so let’s understand the mortgage process together.

What is a mortgage loan?

A mortgage loan gives you the opportunity to purchase a home without having all the money upfront. In order to secure the loan, you have to enter into an agreement with a lender, or bank. You will then pay monthly payments for a specific term.

There are many components to a monthly mortgage payment. Here's a breakdown:

1. Principal:

   The principal is the value of the loan. The portion of the payment made toward the principal reduces how much you owe on the loan. To lower your loan's initial principal amount, you can apply more of your funds to the purchase price of the home, referred to as a down payment.

2. Interest:

   The lender charges you interest for borrowing money from them.
   It is typically expressed as a percentage, which is known as the interest rate. Principal and interest will make up most of your monthly payments, which will reduce your debt over a fixed period of time.

3. Taxes:

   When you buy a home, the local community collects taxes based on a percentage of the home's value. These taxes usually go to helping the community with education, roads, and more.

4. Homeowners Insurance:

   If a fire, natural disaster or theft were to occur, mortgage lenders require you to have homeowners’ insurance to cover it. Most lenders collect the insurance premiums as part of your monthly payment.

5. Collateral:

   When you enter into the legal agreement with a lender, your house is used as collateral for that agreement. It is usually seen as extra security for the lender. If you fail to pay back the loan, the bank can take your house back through a process called foreclosure.

When you apply for a loan, you’ll need to consider the different types of mortgage loans. Learn about the two most common types.

1. Fixed-rate mortgage:

   With a fixed-rate mortgage, the interest rate doesn’t change, so the monthly principal and interest payment remains the same.

2. Adjustable-rate mortgage:

   The interest rate on an adjustable-rate home loan, or ARM, is generally fixed for an initial period of time, such as five, seven, or 10 years and then switches to a variable rate of interest. For example, the lender can set your interest rate at 4 percent for five years and then adjust it according to their own practices. As the rate changes, monthly payments may increase or decrease. More than likely, your lender will have multiple loan plans. Make sure you speak with them to choose the right one for you.

Get a jumpstart on your home search by applying for a Mortgage Loan with Jefferson Bank. No matter what kind of loan gets you into a home, make sure you do your homework and find the right lender for your future. Stop by any of our Jefferson Bank locations to chat about your options or visit the Mortgage Center on our website.