Mortgages 101: Understanding the basics
Picking out and planning for a future home should be an exciting task, but the thought of all the financial terminology that comes with it may seem intimidating. Thinking about mortgages can be an overwhelming experience, especially if you don’t have much knowledge about them in the first place. You’re not alone, so let’s understand the mortgage process together.
What is a mortgage anyway?
In simple terms, a mortgage is a loan that is used to finance your house. In order to secure the loan, you have to enter into an agreement with a lender, or bank. The lender will give you the loan as cash up front, which you will then pay back over a set time span until the loan is paid in full.
Is there more than one part to a mortgage?
Yes! There are actually five parts to a mortgage: collateral, principal, interest, taxes, and insurance. Here's a breakdown:
1. Collateral: When you enter into the legal agreement with a lender, your house is used as collateral for that agreement. If you fail to pay back the loan, the bank can actually take your house back through a process called foreclosure.
2. Principal: The amount of money that the bank lets you borrow is known as the principal. To lower your loan's initial principal amount, you can apply more of your funds to the purchase price of the home, referred to as a down payment.
3. Interest: The lender charges you for borrowing money from them. This is called the interest. It is typically expressed as a percentage, which is known as the interest rate.
Principal and interest will make up most of your monthly payments, which will reduce your debt over a fixed period of time.
4. Taxes: When you buy a home, the local community collects taxes based on a percentage of the home's value. These taxes usually go to helping the community with education, roads, and more.
5. Insurance: Just like you have health insurance to cover you when you are sick, lenders will require you to buy home insurance. This insurance typically covers natural disasters, fire, theft, etc.
Understanding how all of these components intersect makes understanding mortgages easier.
Are there different types of mortgages?
Yes! The two most common types of mortgages are fixed-rate mortgages and adjustable-rate mortgages. Here's a breakdown:
Fixed-rate mortgage: Remember interest rate? With a fixed-rate home loan, that interest rate is fixed, meaning it stays the same until the loan is paid off. Each monthly principal and interest payment will be equal for the length of the loan.
Adjustable-rate mortgage: The interest rate on an adjustable-rate home loan, or ARM, can change from year to year. ARMs can be a hybrid of both adjustable-rate and fixed-rate. For example, the lender can set your interest rate at 4 percent for five years and then adjust it according to their own practices.
More than likely, your lender will have multiple loan plans. Make sure you speak with them to choose the right one for you.
I've learned the basics about mortgages. What's next?
Learn about the mortgage process! No matter what kind of loan gets you into a home, make sure you do your homework and find the right lender for your future. Stop by any of our Central Bank locations to chat about your options or visit the Mortgage Center on our website.
The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its affiliates and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.