What Is Mortgage vs. Real Estate? | Mortgage 101

What Is Mortgage vs. Real Estate?

07:25 AM July 31, 2019

Real Estate is everything that mortgage needs, although Mortgage and Real estate relate to each other like peanut butter and jelly, In this article, I will give you a quick Mortgage101 and run down on how real estate transactions work.

What is Mortgage?
What is Mortgage

For the majority of people that buy real estate, the need for a mortgage in order to finance the cost of the property is essential for making real estate ownership a reality. If you have opted to buy a home, apartment, or other property you will probably need to take out a mortgage.

While a mortgage is usually considered to be a loan by many people, it is, in reality, a lien on the property. When the bank maintains a mortgage on a property, it means that the bank can reclaim ownership of the property if the buyer does not make loan payments on time.

A mortgage works in a similar fashion to a car loan. Taking out a mortgage means that the amount loaned out is secured by the property itself. Mortgages also have to be paid in monthly installments so that the principal and interest are covered.

Mortgage loans are typically calculated so that the principle and interest payments are spaced out over a set period of time. The terms are typically between 10 to 30 years for the average mortgage and last until the entire principal has been paid off.

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A mortgage is typically the largest debt that any homeowner will ever have. Before applying for a mortgage, you should have a good idea of what is involved in the application process so that you can be sure that you will be approved. In addition, understanding the terms of a mortgage before you sign a contract is important so that you will know whether or not you can really afford it.

Qualifying for a Mortgage

If you want to be approved for a mortgage, there are a number of criteria that need to be met in order to qualify. The first important point is to make sure that your credit score is good to excellent. At a minimum, you need a credit score of 680 or better.

Some of the other factors that will help you to become qualified include:

  • A front-end ratio of 28 percent
  • A back-end ratio of 36 percent
  • Being employed at the same job for at least two years
  • Verification of your earnings and employment
  • Thorough documentation of your financial situation
  • An appraisal performed by a professional
  • Private mortgage insurance (applies in some cases, especially when the amount of the down payment is low).

Mortgage Types

There are several different options when it comes to the type of loan that you want on your property. In addition, only certain types of loans are available to specific individuals. The three main types of mortgages are conventional loans, VA loans, and FHA loans.

Conventional Loans: Conventional loans are offered by private lenders, typically banks. You can not obtain a conventional mortgage from the government. In addition, these types of loans often have strict requirements that mean that you must have good credit. In addition, you must have cash available to cover the down payment, which can be up to 20 percent of the value of the mortgage in order to get approved.

FHA Loans: FHA loans are offered by the Federal Housing Administration. These loans are given out by the government. FHA loans are designed for individuals that can not afford to make a substantial down payment or have other credit issues.

VA Loans: VA loans are guaranteed by the U.S. Department of Veterans Affairs. These loans are only available to military personnel that incisively on duty or are veterans. There are also some qualifications that must be met in order to obtain these loans.

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Real Estate Debt
Real Estate Debt

While mortgages can be helpful for obtaining homeownership, occasionally homeowners run into financial problems.

These problems can be caused by issues such as unsecured debt, credit card debt, loss of employment or other problems. If you have a mortgage, there are options for helping you to pay your mortgage while getting your debt problems under control.

Mortgage Refinancing
Mortgage Refinancing

Mortgage interest rates have reached the lowest levels in some time. If you want to find some money for paying your other bills, refinancing your mortgage to a lower rate could help. It is important to understand that refinancing does come with fees and it may also extend the length of your mortgage.

Cash-out Refinancing
Cash-out Refinancing

Cash-out refinancing is available to homeowners that have a significant amount of equity in the property.

After a cash-out refinance you will have cash that you can use to pay other debts. A pitfall of this method is that unsecured debts are now tied to your property and you have compromised the equity in your home.

Home Equity Loans
Home Equity Loans

Home equity loans or second mortgages can be used to pay off other debts. You are eligible if you have equity in your property. You will receive a lump sum of money at a fixed-rate.

Real estate transactions encompass both the buying and selling of property. In order to perform such transactions, decisions must be made regarding the home’s value, the current status of the local real estate market and what terms for buying or selling would be best.

What is Real Estate?
What is Real Estate

Here Are Some Real Estate Types

Real estate comes in three main types which are resident, investment and residential. Residential real estate refers to the individual properties that are owned for residential purposes. It is the most common form of real estate in the United States.

Commercial real estate refers to properties that are used primarily for business purposes. Investment real estate refers to real estate that the owner buys in order to earn income. The investor is not looking to live or use the property personally. Rather, the property is leased out to another individual, which can help generate income for the property owner.

Real Estate Benefits and Drawbacks
What is Mortgage vs. Real Estate

Since real estate transactions are taking place in an ever-changing market, there are some risks associated with owning real estate. These risks include:

  • The potential for a decline in property values due to changing market conditions
  • Potential liability for any problems that occur on the property
  • Risk of going into debt due to mortgages

Although these drawbacks are significant, this has not stopped people from investing in real estate. When things do go well, owning real estate can result in significant financial rewards. Some of the benefits of owning real estate include:

  • Short term profits realized upon selling the real estate in a market upswing
  • The potential to take out additional loans for other needs while using the owned real estate property as collateral
  • The diversification of an investment portfolio

Published July 31 2019; Updated November 14, 2019.

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TAGS: FHA Loan, Mortgage
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