What Is A Mortgage?

Alright, so if this is your first time
looking into real estate and if you don’t know what a mortgage is, stick
around, we’re gonna talk all about it. Hey, friends. Stephen Michael Miller here and
we got a question from Joey and he was asking how does a mortgage work? Well
let’s just jump right into it. First of all, in order to understand how a
mortgage works, you need to know what a mortgage is and in very simple terms, a
mortgage is just the way that a bank lends you money with a promise of
repayment, okay. That’s really what it is on a very simple terms but I want
to dive into some of the details of really what a mortgages and why we even
have mortgages. As you’re probably aware a lot, of you watching this right now and
I’m gonna speak specifically to the younger generation here for just a
moment. You may not have a mortgage yet, maybe you’ve never had one before. If
you’re not into adulthood yet or if you’re in your early
20’s maybe, you haven’t quite gotten to that to that spot where you’re ready to
buy a home so maybe you’ve never gotten a mortgage before. Why would a bank be
willing to lend you money? Well banks are in the business of making money, right. So
when a bank lends you money or when they give you a mortgage, you sign papers and
you promise to pay them back but you’re not just gonna pay them back the amount
that they lent you, you’re actually gonna pay them back interest. Now interest is
that money, it’s the cost of the money that you are borrowing from the bank,
right. Interest rates vary depending on the loan that you’re getting, the type of
loan that you’re getting which I’ll talk a little bit about here as well but that
interest has to be paid over time so the mortgage lender, the bank, they say,
let’s just do an example here, they say here’s $100,000 because you
don’t have $100,000 cash to go out and buy a property on your own, right. They
say here’s $100,000 that we will lend you, in order for us to lend this to you,
they often will require you to put some of your own skin in the game, right. They
want you put a little bit of down payment down, they call it a down payment
and so you take a certain percentage of money to put down on the property on a
primary residence or home that you’re purchasing for you to live in yourself
that’s probably going to be somewhere between 3% and 5% somewhere right in
that range is very very typical, sometimes you can get into different
government fund programs where you can do a 0% down
program or where they basically say, hey, we’ll take that risk on ourselves
or we’ll offer up some of that as a government institution to allow you to
get into at home easier so some of those things are available at times but you’re
typically going to put in 3% to 5% as a down payment.
The bank then says, okay, you’re a worthy person to let lend to. If you’re willing
to put three to five percent down, we will put the other 95% to 97% into
this property and you can then purchase it, right? So the bank then says, they then
pay the person that’s selling the home that, you know, that $97,000,
you put your $3,000 in, the seller has their money, they now have
sold the home to you but in that scenario, the bank is either they own the
title or they have the title to the home. The title is the ownership document,
right, basically says you own this property so although it says you own it
the bank, they are holding on to that title for a period of time until you pay
that debt off so your goal is over the life of the loan, to pay off that loan,
right. It’s to pay down that hundred thousand dollars that you borrowed from
the bank or that ninety seven thousand dollars that you borrowed from the bank
this is done in an amortization schedule so there are several different types of
loans that you can get. I want to talk about two right now just for the
purposes of this video. You can either get a 30-year loan or a 15-year loan. Now
they are exactly as described, exactly as the name says, one last 30 years, the
other one lasts 15 years the 30-year loan is very very typical, a lot of
people, most people I would say that go in to buy a home a primary residence or
even an investment property will get a 30-year loan. What that allows you to do
is to pay less of a payment each month but you will end up paying probably a
little bit more over time because of course, it goes on for 30 years and
you’re paying interest on that loan over the entire 30 years. A 15-year loan is
sometimes attractive to individuals because although it means a little bit
more of a payment each month, you pay over a lesser period of time. Now this is
in terms of a primary residence. If you’re buying an investment property,
most people, at least with the systems that we implement and use, you’re
typically not going to hold on to a property past five years so we will
usually tell people to do a 30-year loan because cash is king today, the more cash
you can keep in your own pocket today, the better you are so instead of paying
more to the bank in a 15 year loan, you may opt to pay less to a bank in a
30-year loan so that you can keep more cash and invest more now. So a mortgage
is a loan, you’re getting money from the bank, right? Or basically, the bank
is paying the sellers but you’re borrowing that from the bank, you’re
paying interest on that mortgage and so that’s why the banks are willing to do
it because they’re not only getting their principal back or the loan amount
that they lent you but they’re also earning principal. Over a 30-year loan,
that can equate to three times as much as the original loan value which is why
a lot of people like to pay off their homes faster but I’m telling you right
now, in investment real estate, you don’t necessarily want to pay off that loan as
fast as possible, you want to use the money to your greatest advantage. Money
today is always more powerful than money tomorrow. Typically, right? Cash is king so
the more you can keep in hand and invest if you are reinvesting in any way the
better for you. Mortgage, a mortgage, it is a loan, it is debt. A lot of people
are concerned about debt, of course, we’re taught in our society to become really
concerned about debt but I will tell you this, debt can be good and debt can be
bad. Consumer debt is bad, right? Don’t do so much of the consumer debt, in
other words, don’t rack up credit cards to go buy clothing and toys and
different things like that but if you’re buying real estate with the purpose of
earning money, with the purpose of doing a real estate type of business, with the
purpose of growing a portfolio, that can be what we call good debt, taking on a
mortgage or getting a mortgage from bank, getting a loan from a bank that you’re
even gonna be paying interest on, if you’re earning more an interest then
you’re paying out the bank in interest that can be a really great investment
because and the payments that you’re getting
from the home are not only paying off your property, paying off that mortgage,
right. That monthly payment which includes both the principal and the
interest but if you’re doing it right, it’s also gonna pay you above and beyond
what those monthly payments are. This is what cash flow is, this is why mortgages
are great if used properly in a real estate investment. Okay, so by now you
should be ready to purchase your first home right? You’re gonna go out and get
that mortgage, you know what it is. Hopefully you understand the difference
between the 15 and the 30-year, right? What are you gonna do? I’d love to hear
what you’re gonna do and how you’re gonna go to and maybe the banks that
you’re ready to talk to you. Put them in the comments below and keep on watching.

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