A mortgage is a type of loan that’s used to purchase a home or other piece of real estate. Because mortgages are so complex, it’s important that you understand them before you start the home buying process.
You can read the basics on this page, or go to one of the article pages we’ve created that explains the details of specific concepts and aspects of getting or refinancing a mortgage:
- Pros and Cons of a Fixed Rate Mortgage
- Pros and Cons of Adjustable Rate Mortgages
- How to Qualify for a Mortgage
- Mortgage Interest Rates and Points
- Mortgage Closing Costs
- Down Payments and Private Mortgage Insurance
- Basics of Refinancing a Home Mortgage
Mortgages 101: The Parts of a Mortgage
A mortgage is made up of two parts – interest and principle. The principle is the amount of money that’s needed to purchase the home. The principle on your mortgage may be lower than the actual purchase price for your home if you made a down payment. The interest on a mortgage is the cost of borrowing the mortgage. The total amount of interest is based on the loan amount and the interest rate. Both the interest and the principle are added together to make your mortgage.
Fixed vs. Adjustable Rate
Mortgages come in all sorts of “flavors,” but there are two basic types – fixed rate mortgages and adjustable rate mortgages. Fixed rate mortgages have the same interest rate for the entire mortgage. Since the interest rate remains the same, the monthly mortgage payment also remains the same.
Adjustable rate mortgages, on the other hand, have an interest rate that fluctuates during the mortgage. Because the mortgage rate changes, the monthly payment also changes, making it harder to predict the monthly mortgage payment. An adjustable rate mortgage may start with a few years of fixed interest rate before the adjustable rate kicks in. Once the interest rate starts adjusting, it could change every month or every few years depending on the mortgage terms.
Mortgage Amortization
As you make payments on your mortgage, you reduce the principle balance on the mortgage. In the beginning, the majority of your payment will go toward the interest and only a small part goes toward the principle on the loan. Over time, you’ll pay down the interest and more of your payment will be applied to the principle on the mortgage. This process of reducing the principle on the loan is known as amortization. When you sign up for the mortgage, you might receive an amortization schedule that shows you exactly how your payments reduce the principle and interest on the mortgage throughout the mortgage term.
Qualifying for a Mortgage
If you’re like most people, a mortgage will be the biggest loan you’ll ever apply for. As such, the mortgage application process is lengthy and involved. But it’s in your best interest. The lender goes through a lot to make sure you qualify for a mortgage that you can afford to repay. Not only that, the lender checks to make sure the home is of good quality. During the mortgage process, you can expect to have the lender check your credit history, your employment history, your bank records, paystubs, and even your tax return. They’ll do an inspection and appraisal of the home to make sure there are no major defects and that the home is worth the amount you’re borrowing for it.
These articles will give you a better understanding of mortgages and the mortgage process:
- Pros and Cons of a Fixed Rate Mortgage
- Pros and Cons of Adjustable Rate Mortgages
- How to Qualify for a Mortgage
- Mortgage Interest Rates and Points
- Mortgage Closing Costs
- Down Payments and Private Mortgage Insurance
- Basics of Refinancing a Home Mortgage