Mortgage loans are a fundamental component of homeownership, enabling many people to purchase homes without paying the full price upfront. However, navigating the world of mortgages can be daunting for both first-time homebuyers and experienced homeowners. Fortunately, it just takes a bit of education to begin understanding home loans. This essential information can make the buying process clear from the start.

If you’re considering the purchase of a new home, here’s what you need to know about loans, including the types of loans that may be available to you.

When you take out a loan on a home, it’s referred to as a mortgage. This type of loan is an agreement between the person purchasing a home and the lender, which enables you to purchase a home. Lenders are willing to insure a mortgage because they have the right to take back the property if you don’t pay your monthly loan plus the interest you’re paying for borrowing.  

The best way to find the right mortgage is to look at specific details. Look at the size of the loan you’ll be borrowing to cover the cost of the home, as well as the types of loans you qualify for. Next, you’ll want to evaluate the interest rate that potential lenders are offering. Ask what you will need for closing costs. And be sure to work with a local lender like Towne Mortgage of the Carolinas or North State Bank. Local lenders will sit down with you to explore your options. They will also explain the details that will help you figure out what’s right for you.

Your loan officer is the go-to member of your home buying team. This person works directly with you to determine if you are eligible for a loan. They are the ones who evaluate your financial information and authorize it for approval. Your loan officer will also keep everything on track as you head toward closing. They will also provide you with insights as you make your financial decisions on a mortgage.

Mortgage points allow you to pay down your interest rate. Typically, one point is one percent of what you are borrowing, which removes .25 percent from your interest rate. As an example, a $400,000 mortgage with a 6 percent rate would cost $4,000 and would reduce your rate to 5.75 percent. Mortgage points can be beneficial to bring down your interest rate. That’s particularly true if rates are high when you are looking to buy.

The loan process begins with origination, which are the numerous steps it takes to begin the process through approval. Buyers must first get pre-approved. For pre-approval, a loan officer will collect financial documents and send it to underwriting to assess whether the person is a good candidate for the loan. The underwriter compares the loan-to-value ratio, which is the value of the loan compared to the market value of the home. This information determines how much risk they may be taking on by lending to a buyer. Once approved, and after a buyer’s offer is accepted, the bank finalizes the paperwork the buyers sign to complete the purchase of the home.

Buyers pay back mortgage loans over a term — typically over 15, 20, or 30 years — through regular monthly payments. The loan includes the principal, which is the amount of money a buyer borrows to purchase the home, as well as interest, which is the cost of borrowing the money that you owe the bank. Your lender will provide an amortization schedule, which outlines each monthly payment you make until the loan is paid off. It explains where each part of the payment goes. Any extra payments you make toward the principal will reduce the amount of time you repay the loan.

In addition to principal and interest, your payment may include Private Mortgage Insurance (PMI) and escrow payments. PMI is insurance the borrower pays if the down payment was less than 20 percent of the home’s value. PMI premiums are paid to the lender to offset any risk if the buyer doesn’t make mortgage payments. In addition, another portion of a mortgage payment typically goes to an escrow account. The escrow account holds homeowners’ insurance and property taxes. These payments are separate from the principal and interest. However, you will pay one lump sum with your loan each month.

There are numerous types of loans available, some of which have pros and cons depending upon a buyer’s needs. It’s important that you discuss these options with your lender to find the option that’s right for you. The following are examples of the types of loans that may be available to you.

Without a mortgage loan, it would be difficult if not impossible for most buyers to obtain a home. Keep in mind that a mortgage comes with significant responsibilities and commitments. However, when you begin understanding mortgages by recognizing the different types of loans, how lenders decide if you’re eligible, and how to navigate the process, you can make informed decisions that result in you owning the home of your dreams. Whether you’re a first-time buyer, you’re moving up, or you’re downsizing, staying informed and prepared is key to a successful mortgage experience.