Understanding Mortgage Loans: Only What's Needed is Borrowed

When looking to purchase a home, mortgage loans can seem mysterious and complex. Often, questions arise such as, if you get a mortgage loan for $125,000 and don't spend it all on the property, do you get to keep the remaining amount? Let's delve into the basics of mortgage loans and clarify some common misconceptions.

The Basics of Mortgage Loans

Mortgage loans are financial products offered by banks and other financial institutions to help individuals purchase real estate. When you apply for a mortgage, you are typically approved for a loan up to a certain amount, usually based on your creditworthiness, income, and the property's value.

Buying an Existing Home

In the case of buying an existing home, the mortgage loan amount will usually cover 80% of the purchase price, with the remaining 20% being covered by a down payment. For example, if the property you want to buy is priced at $120,000, you can borrow up to 80%, which is $96,000. In this case, you would need to put down $24,000 in cash. Thus, the mortgage amount and the property price are in direct correlation, with no extra money being left over.

Construction Loans

When it comes to buying a property through a construction loan, the process is slightly different. Here, you will sign for drafts against the loan at various stages of construction. You may spend the entire amount, or if you overshoot your budget, you won't receive the final draft. Eventually, these construction loans need to be converted to a permanent mortgage to cover the entire cost of the property.

Common Misconceptions

The misunderstanding about mortgage loans often stems from a few key points. For instance, many people believe they can borrow more than the property is worth. This is not the case. Banks willingly grant loans only up to the purchase price of the home, minus a down payment. It's important to understand that any extra funds are not available to you after closing.

Adjustments at Closing

By the time you reach the closing stage, the lender has made final calculations and adjusted the loan amount accordingly. If the final price of the home is $124,500, your loan will be for that exact amount. Should the final price be $125,500, you will need to bring the additional $500 to closing.

Additional Considerations

While it's true that mortgage loans are to finance the purchase of a specific property and usually do not leave you with any leftover funds, there are two scenarios where this might not fully apply.

Cash Out Refinancing

A cash out refinance involves using the equity in your home to take out cash, typically to use for other purposes. In this scenario, you pay off your existing mortgage and receive an additional lump sum, which can be used as needed.

Note: This is different from a mortgage loan intended for buying a home. When you are approved for a mortgage up to $125,000, if you only need $100,000, that's what you will use. You cannot get the rest of the approved amount because banks only loan you up to a maximum percentage of the home you purchase.

Conclusion

In summary, understanding how mortgage loans work is crucial when buying a home. It's neither a mystery nor a way to receive extra money. The loans are specifically tailored to cover the cost of the property, and any additional funds are not available. If you find yourself in a situation where you are being asked for more funds than the final property price, it's likely a misunderstanding or a different type of loan product. Always ensure you have a clear understanding of the terms and conditions of any loan before signing.