What is a mortgage?

What is a mortgage? What’s a fixed rate, ARM, or I/O mortgage?

HOME OWNERSHIP 101

The very basics

If you do not have all cash to buy a home, or if you would like a loan to buy a home – you can get a mortgage. A mortgage is a loan used to buy or refinance a home. 

What are the different types of mortgages?

The most popular mortgages are a 30-year fixed and a 15-year fixed. Some mortgages can be as short as five years; some can be 40 years or longer. You can either select a fixed rate, adjustable rate, or interest-only mortgage. Stretching payments over more years reduce your monthly payments but increase your total interest.

What is a fixed rate mortgage?

With a fixed-rate mortgage, you pay the same interest rate for the life of the loan. The monthly principal and interest payment never change from the first mortgage payment to the last. If market interest rates rise, your payment does not increase. If interest rates drop significantly, you may be able to secure that lower rate by refinancing the mortgage. A fixed-rate mortgage is also called a “traditional” mortgage.

What are adjustable rate mortgages (ARMs)?

With an adjustable-rate mortgage (ARM), the interest rate is fixed for an initial term then fluctuates with market interest rates. The initial interest rate is often a below-market rate, which can make a mortgage more affordable in the short term but possibly less affordable long-term. If interest rates increase later, you may not be able to afford the higher monthly payments. Interest rates could also decrease, making it more affordable. In either case, the monthly payments are unpredictable after the initial term.

What are interest only mortgages?

In interest only (I/O) mortgages – you are required to pay only interest with the principal repaid in a lump sum at a specified date. These are less common and involve complex repayment schedules and are best used by sophisticated borrowers. Interest-only payments may be made for a specified time period, may be given as an option, or may last throughout the duration of the loan. Many homeowners got into financial trouble with these types of mortgages during the housing bubble of the early 2000s

What is a reverse mortgage?

Reverse mortgages are not for you but for homeowners 62 or older who look to convert part of the equity in their homes into cash. These homeowners borrow against the value of their home and receive the money as a lump sum, fixed monthly payment, or line of credit. The entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home.

Which mortgage should you get?

You should avoid I/O mortgages for your primary residence. If you are buying your first home, then it’s highly likely that you’ll buy your next home within 10 years. In that case, a 7/1 ARM might work. However, talk to your loan originator for more details.

Is the monthly mortgage payment all that I need to pay?

Aside from your mortgage payments, you also need to typically pay

  • Taxes owed to the local government
  • Insurance
    • Home insurance is mandatory
    • Mortgage insurance is typically mandatory if you have less than a 20% down payment
  • Home Owners Association Dues (HOA) – only if you live in an HOA community like a condo

For more details on fees, read more here.

You could reduce your monthly mortgage payments and eliminate mortgage insurance if you work with Home.LLC!

Further Read https://www.rocketmortgage.com/learn/what-is-a-mortgage


Nik Shah

Nik is the founder and CEO of Home.LLC

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