Mortgage

Mortgage summary: 

• Mortgage loans are a type of secured debt that uses the real estate you’re buying as collateral. 

• Your credit score, the size of your down payment, and the length of the mortgage term (typically 15 to 30 years) can all affect your monthly mortgage costs. 

• Government programs from the FHA, USDA, and VA can help some people qualify for a mortgage with lower credit scores and lower down payments. 

Mortgage Definition and Meaning

A mortgage is a type of loan that’s guaranteed by the home or other real estate you’re buying with the mortgage money. They typically have fixed payments and are amortized loans. That means that at the beginning, more of your payment goes toward interest. As time goes on, more of each payment goes toward your principal balance. 

Home equity loans and home equity lines of credit are also mortgages. 

Mortgage loans are secured loans. Secured loan interest rates tend to be lower than the rates on other kinds of loans. That’s because a mortgage loan uses your home as collateral. Collateral is a financial safety net for the lender. If you fail to repay your mortgage, the lender can take ownership of your home, sell it, and recover the money you owe. 

Because mortgages are secured debts, they cannot be included in debt settlement programs.  

Mortgage loans are usually considered “good debt” because they help you build wealth over time. Mortgage loans can be a good investment in the financial foundation of your family’s life. 

Key Features of a Mortgage 

The exact details of your mortgage depend on a wide range of factors. Your home’s price, your credit score, and current mortgage rates all help decide the cost of your mortgage. 

Every mortgage loan tends to have these features in common.

Interest (APR)

Mortgage lenders charge interest. The interest on a mortgage is typically expressed as an annual percentage rate (APR). The APR represents the true cost of a loan for one year, including interest and fees. For a mortgage, APR is usually higher than the interest rate.

Your exact mortgage rate is based on your credit score, how much you want to borrow, the loan program, overall mortgage rates when you apply for a mortgage loan, and other factors.

Term

The term is the amount of time you have to repay your mortgage loan. Most mortgages have terms of 15 years to 30 years. If you choose a 15-year mortgage term, your monthly payments are higher than they would be with a 30-year term—but not double. That’s because owing money for fewer years means you’ll pay less interest.  

Down payment

Many mortgage lenders require you to make a down payment. This is an upfront payment of cash toward the home’s purchase price. 

Some mortgages are available to borrowers who can make a 3% down payment. So if you’re shopping for a $400,000 home, you would need to make a $12,000 down payment. 

Some mortgage programs don’t require a down payment at all, but you have to qualify for the program. For example, VA loans are for the military and Department of Defense communities. USDA loans are for lower income borrowers in mostly rural areas.

Installment loan

Mortgages are installment loans, so the payments are predictable. When you sign up for a 30-year mortgage, you agree to make 360 monthly payments. If you have a fixed-rate loan, your payment amount won’t change. If you have an adjustable-rate mortgage, your payment amount could change if your rate changes.  

Principal and Interest (P&I)

Your mortgage payment includes principal (the amount of money borrowed) and interest (the cost of the money borrowed). Many people also pay homeowners insurance and property taxes as part of their monthly mortgage payment. 

Homeowners insurance and property taxes typically increase over time. This can make your monthly mortgage payment grow, even if your mortgage loan amount stays the same. 

Amortization

Most mortgage loans are amortized. This means a greater share of each payment goes toward interest charges at the beginning of the repayment period. Over time, less of your payment goes toward interest and more goes toward the principal balance.    

Mortgage Types 

There are many types of mortgage loans for different real estate purchases and personal finance goals. 

Here are a few common types of mortgage loans: 

• Conventional mortgage: This type of mortgage isn’t insured or backed by a government agency.  

• FHA mortgage: These mortgage loans are provided through the U.S. Federal Housing Administration (FHA). FHA mortgages tend to be a good option for people with lower credit scores and lower down payments. If you have at least a 580 credit score, you can apply for an FHA loan with a 3.5% down payment. 

• USDA mortgage: The U.S. Department of Agriculture offers USDA home loans in qualifying areas, mostly rural, for people who have low to moderate incomes. These mortgages do not require a down payment.   

• VA mortgage: Military service members, veterans, and surviving spouses can get VA mortgages through the U.S. Department of Veterans Affairs. VA loans don’t require a down payment. They have lower costs compared to other mortgages with low or no down payment requirement.