How a Home Mortgage Works
Purchasing a new house is an exciting milestone — especially for first-time homebuyers. There are many steps to buying a new home, but brushing up on the basics beforehand can help make navigating this big purchase feel easier. The first thing you'll want to do is learn more about your upcoming mortgage and what it entails. Here, Generations Bank explains what a home mortgage is and how it works.
Home Mortgage Basics
For many homebuyers, getting a mortgage is one of the many steps toward ownership. A mortgage is a loan, or agreement between you and a lender, that allows you to buy your home without needing to cover the entire purchase upfront with out-of-pocket money. Most mortgages come from a bank or another financial institution, and borrowers work to pay off the loan over a predetermined period (typically 15, 20, or 30 years).
It's important to understand that technically you don't own your home until the mortgage is paid in full. In this case, your home serves as collateral for the mortgage. This means that if you default on your loan, your lender may repossess the property through foreclosure and sell it to help recover some of the expenses.
What's Included in Your Mortgage Payment
While each home mortgage payment goes toward the principal of the loan (the specific amount borrowed to purchase the home), other costs may be lumped into the monthly bill. Aside from interest, these costs may include:
- Property taxes: As a new homeowner, you are now responsible for property taxes. This tax money may be collected little by little and held in an escrow account. Through this account, your lender can pay your property tax bill at the time it's due.
- Homeowner's insurance: Homeowner's insurance covers your property in case of an unfortunate event. Instead of paying for this separately, lenders typically collect this premium as part of the monthly mortgage payment.
- Mortgage insurance: Mortgage insurance covers the lender. This often is issued if the borrower makes a down payment of less than 20% of the home's purchase price. This cost may be tied to your monthly mortgage payment, closing costs, or both.
It's important to remember that not all mortgages come with an escrow account. Before signing on the dotted line, make sure you're clear about what's included with each payment and any separate responsibilities that may need to be taken into account.
Mortgages Serving Different Borrower Needs
From VA loans for service members to no-closing-cost mortgages, there are several different options available. Many specialty mortgages are designed to meet the unique needs of today's homebuyers. Two common types of mortgages include:
- Construction loans: This type of mortgage is issued to borrowers who are building a new home from the ground up.
- Federal Housing Administration (FHA) loan: Common for first-time homebuyers, this type of loan suits borrowers who are unable to make a sizeable down payment. It is backed by the Federal Housing Administration and issued by the federal government.
Explore Home Ownership Options with Generations Bank
Beginner homebuyers should turn to their local financial institution to find out what's available and explore the best loans for their needs. Generations Bank, based in Seneca Falls, New York, with several locations in the surrounding area, is familiar with local communities and the unique needs of the individuals throughout the region. Visit one of our offices in the Finger Lakes Region and Western New York area or contact us today to learn more about home mortgages.
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