Mortgage Basics 101
What’s a Mortgage?
So, I am guessing you are thinking about buying a home and that someone probably keeps telling you about different kinds of mortgages and all sorts of statistics on how you can save money by doing this and that. Well, some of that seemingly mind-numbing information can be important, but simply knowing the basics about a mortgage and the different types available will allow you to make an informed decision.
A mortgage is a loan secured by a property or a house and paid in installments over a set period of time. It is a secured promise that the money borrowed will be repaid. This could be one of the most serious financial decisions you will make, so understanding all the ins and outs of one is very important; at the very least, have a close adviser who understands.
A loan is simply a really big credit card, usually with lower interest rates, that you repay over a long period of time. The two lengths of mortgages that people usually choose are 15-year, and 30-year loans. This means that you will repay the amount the loan is for to the lender over this amount of time. The 15-year mortgages have higher interest rates in general because you are paying over a shorter period of time and the lender is collecting interest for 15 years fewer than a 30-year loan. To combat the lender’s loss, they usually bump up the interest rates. That extra percentage is usually worth it though, because by paying it off in only 15 years, you will save upwards of 10 thousand to 40 thousand dollars on average (versus the same loan amount with a 30-year mortgage).
A 30-year mortgage will usually give you a lower interest rate than a 15-year mortgage, but in the long run having it an extra 15 years will cost you many thousands of dollars more than paying it off faster. So you have a choice to make… do you want to pay off your mortgage over a longer period of time, but how a lower monthly payment? – or – Pay it off faster, save thousands of dollars and have a higher monthly payment? It really is a tough choice, but that is the first step in understanding what a mortgage is.