Buying a home can be a major financial milestone—but also a major financial commitment. While you might have enough cash on hand to purchase your new home outright, it’s more likely that you’ll be using a mortgage to help fund your purchase.Before you start the application process, here are some fundamentals you may want to know.
Mortgages 101
Applying for a mortgage can be a key step on the path to becoming a homeowner. Learn more about these loans, which can help open the door to your new home.
What Is a Mortgage?
A mortgage is a loan that is secured by real property. In other words, it’s a loan that allows you to buy a home while only paying for a percentage of the total value up front. This upfront payment is called a down payment. If you’re a first-time buyer, your city or state government may be willing to give you a leg up through a homebuyer’s assistance program, so be sure to research all your options.
What Does a Mortgage Cost?
When you take out a mortgage, you agree on the length of time (the "term") for paying off the loan amount (the "principal") and the amount paid in interest each month. Typically, the shorter the term, the lower the interest rate. Other factors that impact your interest rate include your credit, the amount you are borrowing versus paying upfront, and the type of mortgage you choose.
How Do I Get a Mortgage?
You can get a mortgage from a variety of sources, including a bank or mortgage lender. To help ensure that you can pay them back for the loan, lenders may check your credit score and source of income, among other factors.
How Are These Mortgage Payments Applied to My Ownership Stake in the Home?
Typically, a portion of your monthly mortgage payment goes toward paying off your principal. In other words, you can build equity in your home over time. The amount of your monthly payment that goes toward the principal generally increases over time until you own the home "debt-free." And of course, any appreciation on the value of the home belongs to you.
If you want to get a sense of your total costs, it’s important to look at the annual percentage rate (APR). In addition to your interest rate, the APR accounts for other mortgage-related costs like points and lender fees.
Points allow you to pay more up front in exchange for a lower interest rate. Typically, each point equates to about 1% of the loan. You may want to ask your lender about your options.
What Should I Look at When Choosing a Lender?
Go with a lender who has a good reputation and a solid track record. Do your research and ask around for references. Pay attention to the representative’s responsiveness throughout the search process as well as their ability to translate complex topics—there is a lot of jargon in this process!
At the end of the day, the most important element is trust. Don’t be lured by low rates alone—choose a lender you believe understands your wishes, and go with your gut.
What Types of Mortgages Are There?
Fixed-rate Mortgage
You pay fixed monthly principal and interest payments for the duration of the term, which is typically 15 or 30 years.
You may consider this option if:
- You plan to live in your home for a long time.
- You expect interest rates to increase.
Adjustable-rate Mortgage (ARM)
You pay a set interest rate for a pre-defined number of years, after which the interest rate is adjusted based on the underlying index, which may move up or down based on market conditions. The initial rate period can typically be anywhere between three and 10 years.
You may consider this option if:
- You plan to sell the home before the end of the initial fixed-rate period (e.g., if you plan to move as your family grows or you think of this as a "starter house").
- You plan to refinance the loan before the end of the initial fixed-rate period.
Tip: Uncle Sam wants you to buy a home, which is why first-time home buyers may qualify for benefits such as lower interest rate loans or down payment options from banks or government organizations. Research what options may be available to you.
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Interest-only loans enable borrowers to make monthly payments of only the accrued monthly interest on the loan during the introductory interest-only period. Once that period ends, borrowers must make monthly payments of principal and interest for the remaining loan term, and payments will be substantially higher than the interest-only payments. During the interest-only period, the total interest that the borrower will be obligated to pay will vary based on the amount of principal paid down, if any. If a borrower makes just an interest-only payment, and no payment of principal, the total interest payable by the borrower during the interest-only period will be greater than the total interest that a borrower would be obligated to pay on a traditional loan of the same interest rate having principal-and-interest payments. In making comparisons between an interest-only loan and a traditional loan, borrowers should carefully review the terms and conditions of the various loan products available and weigh the relative merits of each type of loan product appropriately.
The interest rate and payments on an adjustable rate mortgage ("ARM") loan may increase over the life of a loan as interest is fixed for a specified period and then will adjust periodically thereafter. The annual percentage rate may increase after consummation of the loan.
3/6M, 5/6M, 7/6M, 10/6M adjustable rate mortgage ("ARM") loans are based on the Secured Overnight Financing Rate ("SOFR") 30-Day Average.
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