By info@shareamg.com 
Simplify your home loan journey with key mortgage basics, expert advice, and tips to secure your ideal loan.Understand home loans better with this guide to mortgage basics, helping you make smart decisions before buying a house.
Most people can’t afford to pay the full price of a home upfront. Instead, they make a down payment (a percentage of the home’s price) and get a mortgage loan to cover the rest. Here’s how it works:
- Loan: Like a bank, a lender loans the buyer the amount left after the down payment. This amount is called the loan principal. For example, if a house costs $200,000 and the buyer pays a 20% down payment of $40,000, the principal is $160,000.
- Repayment: The buyer repays the loan over time with monthly mortgage payments. These payments usually include part of the principal and interest. If the buyer doesn’t pay, the lender can reverse the house through foreclosure.
- Generally, it’s best if the down payment covers at least 20% of the purchase price. If you don’t have the funds to put down 20% of the purchase price, you can usually still get a mortgage, but you’ll likely have to cover some additional monthly costs. Some first-time buyers may qualify for FHA (Federal Housing Administration) programs that require only 1–3% down payments. Talk with a lender about whether you might be eligible for FHA programs.
Taxes and Insurance
The total monthly mortgage payment is often called the PITI, which stands for principal, interest, taxes, and insurance.
Each monthly mortgage payment might include a share of your yearly property taxes. For example, if your annual property taxes are $2,400, $200 might be added to your monthly payment along with the principal and interest. However, in some cases, homeowners pay property taxes directly, not as part of their mortgage payment.
Insurance: Lenders typically require homeowners to purchase homeowner’s insurance, which covers the home and its contents in the event of a flood, fire, or other damage. Though some lenders sell insurance, homeowners often purchase insurance from a separate firm. If buyers can’t pay at least 20% of the home’s price as a down payment, they usually need to buy private mortgage insurance (PMI). PMI protects the lender if the buyer can’t pay back the Mortgage Basics. PMI can add $50–100 to the monthly mortgage bill.
Types of Mortgages
The two types of mortgages most commonly offered are fixed-rate and adjustable-rate mortgages.
Fixed-Rate Mortgages
Interest rates rose and fell over time. In the early 1980s, interest rates went up to almost 19%, but in 2006, they were around 5%. A fixed-rate mortgage protects you from these changes by locking in one rate for the entire loan term.
Advantages of Fixed-Rate Mortgages
Stability: The interest rate on a fixed-rate mortgage stays the same, even if interest rates increase in the economy. This means your monthly mortgage payments will always be the same. If you’re paying $1,500 a month now, you’ll still be paying $1,500 a month ten years from now.
Disadvantages of Fixed-Rate Mortgages
Higher initial costs: Fixed-rate mortgages usually have higher interest rates than adjustable-rate mortgages, which are riskier. This means your monthly payments will likely be higher with a fixed-rate mortgage, at least during the first 3–10 years.
Fixed-rate mortgages can last 15, 20, 30, or 40 years, with the 15-year and 30-year options being the most common.
Adjustable-Rate Mortgages (ARMs)
An adjustable-rate mortgage (ARM) has an interest rate that can change at specific points throughout the loan term. Most ARMs offer a fixed rate for a certain period (3, 5, 7, or 10 years), after which the rate adjusts to match the interest rates the financial markets offer
Advantages of ARMs
Lower initial costs: In the beginning of an adjustable-rate mortgage (ARM), interest rates are usually lower than the fixed rates on fixed-rate mortgages. This means your monthly payments will be lower during the initial fixed period of an ARM.
Disadvantages of ARMs
Risk: Adjustable-rate mortgages (ARMs) come with risk. While your initial rates may be lower than a fixed-rate mortgage, you’ll pay more if interest rates increase after the fixed period ends.
There are different types of ARMs. Some only change their rates once, at the end of the fixed term, and then stay at that new rate. Others adjust their rates every 6–12 months to match current rates. Like fixed-rate mortgages, ARMs usually last for 15 or 30 years.
Interest-Only Mortgages
With ARMs, you can pay only the interest on the loan for a fixed period (usually 5–7 years), instead of paying both interest and principal. Since you’re not paying down the principal, your monthly payments are much lower than those of standard fixed-rate mortgages or other ARMs.
However, when the interest-only period ends, you have two options:
- Pay off the full balance in one lump sum, which usually means paying tens or hundreds of thousands of dollars.
- Start paying off the principal along with the interest in your monthly payments. This will make your payments go up a lot, even if interest rates don’t rise. If interest rates do go up, your payments could increase even more.
Mortgages and Tax Deductions
The U.S. government encourages people to buy homes by allowing them to subtract the interest they pay on their mortgage each month from their taxable income. This can lower your monthly payment, depending on your income tax bracket.
For example, if you’re in the 28% tax bracket and pay $1,000 in interest each month, the deduction lets you pay only 72%, or $720.
These tax deductions are beneficial in the early years of a Mortgage Basics because you pay more interest than principal. So, most of your monthly payment is tax-deductible in the first months and years.
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