Mortgage Information

If you’re new to buying a home and don’t have the time to read an encyclopedia on mortgages, this is the article for you. We’ll go over some basic mortgage terms and concepts to get you started.

Deciding to buy a home and obtain a mortgage is a serious decision with significant responsibilities. Not only must you spend money upfront to obtain your loan, you’ll be entering (or increasing) your debt. You’ll also be responsible to pay a large monthly payment. Hence it is important that you choose wisely what loan to get and where to get it.

You’re mortgage education should start with some basic explanations that will help you understand and pick your loan: closing costs, APR, rate, monthly payment, ARM, fixed, and of course, mortgage.

First, what is a mortgage? A mortgage is a loan used to either purchase a property or to pay off an existing mortgage loan. The property itself becomes the collateral. In other words, if the borrower defaults on the mortgage, then the mortgage owner has legal claim to the house and can take possession of it.

The term “rate” refers to the percentage used in calculating the amount of interest you’ll pay for your loan. The interest is essentially your cost for borrowing money. If the interest rate remains the same throughout the loan term, then the mortgage is considered a “fixed-rate” loan. On the other hand, if the rate can change, then the mortgage is called an adjustable rate mortgage or an ARM.

In addition to interest, there are additional costs to borrowing money for a home. These fees might include paying for the loan application, checking your credit history and scores, underwriting (seeing if you qualify for a specific loan program), title search and insurance, having the property’s value appraised, loan origination, etc. All together these fees are called “closing costs”.

Using the interest rate by itself an ineffective way of deciding where to buy a loan because two lenders with the same rate can charge different closing costs, making one loan more expensive than the other. That’s why you should always look at the APR, or Annual Percentage Rate. The APR takes into account closing costs and provides a more equalized measurement for comparing mortgages.

When choosing a loan, pay special attention to the loan’s total monthly payment. This amount includes what you’ll pay on principal and interest, property taxes, hazard or homeowner’s insurance, HOA dues, and mortgage insurance. When mortgage insurance is factored into your monthly costs, some loans with a higher interest rate might actually have a lower monthly payment. You could end up paying less overall if you pick one of those loans.

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