MORTGAGE
101

Buying a home loan doesn’t have to be intimidating – especially when you understand the basics.

Fixed vs. Adjustable

Every home loan has two parts: principal and interest. The principal is the amount you borrow, and the interest is what you pay to borrow the money. Different home loans give you options on how to structure your interest payments to meet your specific needs.

When shopping for a home loan, there are two major types of loans that you can choose from: a fixed-rate mortgage or an adjustable-rate mortgage (ARM).

With a fixed rate mortgage, your principal and interest payments stay the same for the life of the loan—a good choice if you’re planning to stay in your home for a long time. Because the interest rate doesn’t change, you’re protected from rising rates for the life of your loan.

The main features of a fixed-rate mortgage are:

• Principal and interest payments stay the same for the life of the loan
• Consistent monthly payments allow you to budget more effectively
• Choose from varying year terms, such as 30 year or 15 year

With an adjustable-rate mortgage (ARM), also called a variable rate mortgage, your interest rate, monthly principal, and interest payments remain the same for an initial period, then adjust annually based on a rate index.

The main features of an ARM are:

• Typically have a lower initial interest rate than a fixed-rate mortgage
• Interest rate caps set a limit on how high your interest rate can go
• Choose from 5-, 7-, 10- and 15-year fixed terms

If you are considering an ARM, it is a good idea to ask your mortgage lender what your monthly payment would be if interest rates rise 1, 3 or 5 percentage points in the future, so you can get a sense for how much more you may be required to pay.

Government loan programs offered by the Federal Housing Authority (FHA) are also popular and are available in both fixed-rate and adjustable-rate structures. In general, these programs are easier to qualify for and have lower down payment requirements, along with more flexible credit standards. However, like conventional loan programs, FHA loans have specific fees and payments associated with them.

Getting Prequalified

Before you start looking for a home, you will need to know how much you can afford. The best way to do that is to get prequalified for your loan. Many real estate agents want you to be prequalified so they can show you homes in your price range.

To get prequalified, click here . You can also use our Home Affordability Calculator to see the price range of homes you should be looking at.

Terms

The term is the number of years that you will make payments on your home mortgage loan. The longer the term, the lower your monthly payment will be. With a longer term, you will also pay more in interest over the life of the loan.

Use our Mortgage Payment Calculator to see how different terms can affect your monthly payment.

Interest Rates

The interest rate is the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage. It is used to calculate your monthly mortgage payment. The higher the interest rate, the higher your monthly payment will be, and vice versa. With a fixed-rate mortgage, the interest rate will not change. With an ARM, the interest rate is linked to a published index and may change over time.

APR

The annual percentage rate (APR) tells you the estimated total cost of your loan, including the interest rate and upfront fees such as discount points and origination fees. Comparing APRs helps identify the best value when all costs are considered.

Closing Costs

Buying a home or refinancing a mortgage requires services from several parties, including lenders, title companies, and appraisers. The associated fees are called closing costs and typically total about 2–3% of the loan amount, though they may be higher.

Some costs are controlled by the lender, while others are set by third parties. These costs can be paid upfront or, in some cases, added to the loan amount. Your lender will outline these in a Loan Estimate within three business days of processing your application.

Monthly Mortgage Payment

Your monthly mortgage payment generally includes principal and interest. Property taxes and homeowner’s insurance may also be included and held in an escrow account, then paid on your behalf when due.

Taxes and insurance may be reassessed annually during an escrow review. Your mortgage servicer will recalculate your payment and notify you of any changes. These funds continue to be held and paid from escrow.