Home Mortgage Loans

A mortgage lender or bank loan that allows an individual to buy a house.

Last updated May 7, 2022 

What is a mortgage?

A mortgage is a loan that allows an individual to buy a property or home. It can be provided by either a mortgage lender or a banking . It is possible to get a loan to pay the full cost of a house, but it is more common to obtain a loan that covers about 80%.

The loan must be repaid over time. The loan amount is secured by the purchase of the home as collateral.

Different types of mortgages

Two types of mortgages that are most popular are fixed rate and variable-rate.

Fixed-Rate Mortgages

Fixed-rate mortgages offer borrowers an fixed interest rate for a specified term, typically 15, 20 or 30 years. Fixed interest rates have a shorter term, which means that the monthly payments are higher. The monthly payment amount will be smaller if the borrower pays more than the term. The borrower will pay more interest charges if the loan is not repaid in full.

Fixed-rate home mortgage loans have the greatest benefit: the monthly mortgage payment is the same each month for the entire term. This makes it easy to budget and avoid unexpected charges. The borrower does not have to pay more monthly even if the market rate rises significantly.

Adjustable-Rate mortgages

Adjustable-rate mortgages, or ARMs, have interest rates that can and often do change throughout the term of the loan. Interest rates can fluctuate due to changes in market rates or other factors. This affects the amount the borrower has to pay and changes the monthly payment. Adjustable rate mortgages allow the interest rate to be adjusted and reviewed at specified times. The rate can be adjusted at any time, such as once per year or every six months.

The 5/1 ARM is one of the most sought-after adjustable-rate mortgages. It offers a fixed interest rate for the first five year, and then the rate will adjust annually for the remaining years.

Although ARMs can make it harder for borrowers to budget and plan their spending, they are more popular than fixed-rate mortgages because they have lower starting interest rates. If borrowers believe their income will increase over time, they may apply for an ARM to lock in a lower fixed-rate at the beginning.

An ARM has the primary risk that interest rates could rise significantly over the term of the loan. This can lead to home mortgage loan payments that are too high for the borrower. A significant rate increase could lead to default or the borrower losing their home through foreclosure.

Mortgages are a major financial commitment that binds borrowers to decades of payments. Most people think that a mortgage is worthwhile because of the long-term benefits.

 

Mortgage payments

The four major parts of mortgage payments are usually made monthly and include the following:

1. Principal

The principal amount is the total loan amount. The principal amount of a loan is the total amount. For example, an individual who takes out a $250,000 mortgage in order to buy a house would have $250,000. Lenders prefer to see a 20% downpayment when purchasing a home. If the mortgage payment is $250,000 and the appraised value of the home is 80%, the down payment would be $62,500. The total home purchase price would then be $312,500.

2. Interest

The monthly interest rate is the percentage that is added to each mortgage payment. Lenders and banks do not simply lend money to individuals without expecting something in return. Lenders and banks charge interest on money that they lend to homebuyers.

3. Taxes

Most mortgage payments include the property taxes that homeowners must pay. Based on the property’s value, the municipal taxes are calculated.

4. Insurance

Lenders require homeowners insurance to protect the mortgage and the home’s contents. If a person makes less than 20% down payment, they will need to have specific mortgage insurance. This insurance protects the bank or lender in the event that the borrower defaults.

Additional Resources

We are grateful that you have taken the time to read CFI’s Guide to Mortgage and all its variations. These CFI resources can help you further your financial education.

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