How does a mortgage work?

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Mortgages: Home Loans on the Web

Buying a first home is an important milestone in anyone's life. But even if it's your fifth home purchase, the financial jargon and seemingly endless paperwork involved in getting a mortgage can overshadow the excitement of owning your new home. On the Web you'll be able to find resources that help you understand what a mortgage is and how it works; decide which type of mortgage works best for you; find a reputable lender; and even understand what happens after you get your loan. For a Spanish-language version of the Guide, click here.

How does a mortgage work?

It would be nice if getting a mortgage were as simple as asking for one and then getting a check in the mail. But lenders don't give out hundreds of thousands of dollars so easily; you'll fill out lots of financial paperwork, spend days and weeks waiting for answers, and even subject your new home to various inspections. To make sure that you don't find yourself surprised at what you're required to do to get a home loan, take a few moments to read some Web sites that explain the process to you.

Dulcinea's Insight

  • Many sites that provide mortgages also provide some sort of step-by-step review of the process. If you are unclear about the details of how your mortgage will progress, check the Web site of the lender.
  • To read about developments in the mortgage world, try RealEstateJournal.com, a great news source for real estate-related information and part of The Wall Street Journal.

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How mortgages work ...
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Choosing the right type of mortgage

Choosing the right type of mortgage can be as important as choosing the right home. Instead of wandering into a lending institution and letting them lead you through their mortgage process, take the lead yourself by researching the different types of mortgages online and seeing for yourself what's out there. The Web sites in this section help you figure out how much to borrow and how to borrow it by providing unbiased information that's easy to understand.

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  • The two basic types of mortgages are fixed-rate and adjustable-rate mortgages. A fixed-rate mortgage has an interest rate that's set when you first borrow the money and never changes over the life of the loan; adjustable-rate mortgages have interest rates that can go up or down depending on changing federal interest rates.
  • There are lots of different versions of the two basic mortgage types; for additional information about different types of mortgages try the sites listed below or try searching for a definition in a search engine, like this: "definition: balloon mortgage."

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To figure out how much loan you can afford ...
To help you choose the right type of mortgage ...
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Applying for a home loan

Once you have found your dream home you want to be able to move in as quickly as possible; sometimes it's handy to get pre-approved for a loan to get the process moving before you even start your house hunting. Before you wander from bank to bank (or mortgage broker to mortgage broker) applying for home loans, take a look at the information available online to get an overview of what to expect from the mortgage process, to help you decide what kind of lender would suit your needs, and even where you can find the lowest interest rates.

Dulcinea's Insight

  • Loans from Internet-based providers can sometimes be offered at lower rates than those from brick-and-mortar banks because the Internet-only providers often have lower overhead costs.
  • Lots of private lenders (such as quickenloans.com) have tips and tools to help you choose a loan or lender, but know that ultimately the goal of these sites is to get you to borrow money from them, so be aware that they recommend themselves first. Most banks offer mortgages. Try looking at your bank's Web site to see if you can get a special rate or reduced closing costs as an existing customer.
  • Keep track of the rates and fees that are given to you by different lenders (using a spreadsheet or even a pad of paper); sometimes a lower interest rate, after additional fees, actually turns out to be a worse deal than a slightly higher interest rate with fewer fees. If you do the math yourself you'll be able to compare apples with apples to determine what is really the best mortgage for you.

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For help beginning the process ...
To know how your credit score is determined ...
To help you choose a lender ...
To understand the difference between a bank and a mortgage broker ...
To find a broker ...
For organizations that oversee fair lending practices ...
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After mortgage approval: switching lenders, foreclosure, and tax breaks

Once you cross all those t's and dot the i's on your mortgage paperwork, you can finally enjoy your new home, right? Well, there are a few things that can happen after you've closed on your mortgage: You can take advantage of tax breaks on the interest; your mortgage can be sold to another lender; you can refinance; and if you miss enough payments you can go into foreclosure. To make sure that you are prepared for all of these post-closing possibilities, we've assembled a collection of sites that explain and assist you with any of these issues.

Dulcinea's Insight

  • Discuss issues like foreclosure and prepayment with your lender before you close on your mortgage so that you know what penalties, if any, you will incur for late (or sometimes early) payment.
  • After foreclosure, you are occasionally entitled to money back from the principal you have paid. Check with your lender to see if this applies to you.

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If your mortgage is sold to another lender ...
For information about tax breaks associated with your mortgage ...
For information about foreclosure ...
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Home equity debt

You can't always plan for your future financial needs. One way to readily access credit is to use the equity in your home to get a loan or a line of credit. There are a number of ways to use your home equity for immediate financial liquidity; take a look at the following sites to help you determine if home equity debt is your best option for additional funds.

Dulcinea's Insight

  • Home equity refers to the value of your house, minus any outstanding debt. For example, if you bought your house for $100,000 and after 10 years still owed $50,000 on your mortgage but your house now had a value of $150,000, you would have $100,000 in equity ($150,000 value - $50,000 owed = $100,000 equity). Lenders will usually allow you to borrow up to 80 percent of your home's value.
  • Most banks and mortgage lenders offer home equity loans; you should be able to find out if your lender offers this kind of loan by checking its Web site. Be aware of termonology such as, HELOC, which is a common abbreviation for "home equity line of credit."
  • Before applying for any home equity loan or line of credit through an online lender, make sure to check its credibility through an organization that oversees fair lending practices. (There is a list of these in the "Applying for a home loan" section of this guide.) Home equity debt is accrued when you use the equity that you've earned on your house as collateral to get a line of credit or a loan.

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For information about a home equity loan ...
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How reverse mortgages work

Reverse mortgages are almost like taking an advance on the sale of your house; when you take out a regular mortgage you gain equity and lose debt as you pay it off, but a reverse mortgage takes away equity as you collect money from it.

Dulcinea's Insight

  • A reverse mortgage is a way to get cash based on the value of the home that you own; it will decrease the equity that you have earned on your home. Sometimes there are age requirements for getting a reverse mortgage.
  • Be cautious before entering into a reverse mortgage contract with any lender on the Web. Check the Better Business Bureau Web site for an evaluation (or possible complaints against a company) before you agree to a reverse mortgage with any company.

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Real estate and mortgage news

If you want to stay current on market trends or read what others have to say about mortgage rates or housing prices, take a look at the publications and blogs about real estate and mortgages available online.

Dulcinea's Insight

  • If you have a specialty real estate or home loan publication that you regularly enjoy in print, look for the online version by typing the name of the publication into a search engine or by simply adding ".com" to its name.
  • If you are looking for housing or mortgages in your local area, look for the online version of your local paper and see if there is a real estate section that might be able to give you more specific information than you'll find in national publications. You also may find listings for local mortgage lenders in such publications.

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