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Before taking out a loan, it’s important to learn how they work and how you can borrow smartly, safely and at the lowest possible cost. There are a few key things to understand, and the more you know, the more prepared you’ll be. Here are the mortgage loan basics.
A mortgage is a loan from a bank or a financial institution that helps the borrower purchase a house. It’s an informal agreement, involving two parties: the borrower and the lender.
Over many years, the borrower repays the loan, plus interest, until he or she owns the property. But, if the borrower stops paying the mortgage, the lender can foreclose.
These are the essentials on how loans work:
There are two basic types of loans: secured and unsecured.
Secured loans are ones that are protected by an asset. Whatever is being purchased with the lended money can be used as collateral by the lender. If you don’t repay as agreed, the lender can claim the collateral to pay off the debt. Because of this guarantee, the lender’s level of risk is low.
Unsecured loans do not require collateral, so they are more risky for the lender because there is no collateral to recover in case of failure to repay the loan. This is why the interest rates tend to be higher.
Common loan types include:
The lender reviews your financial situation to determine how much they are willing to lend.
The home buyer locates a home, negotiates the price, and signs a purchase agreement.
The borrower completes a loan application with information about the home being purchased.
The loan processor gathers all of the information needed for the loan and creates a file.
The underwriter analyzes the loan file to determine if it should be approved or denied.
The underwriter issues a final approval, and the home buyer attends closing to finalize the deal.
The post Mortgage Loan Basics appeared first on Owings Mills & Lutherville Mortgage.
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