A mortgage is a loan used to buy a home, land, or other type of real estate and is generally long-term. Mortgage terms, meaning the time it takes to repay the loan, typically span 10, 15, 20, or 30 years. The mortgage borrower will repay the loan in monthly installments, along with the agreed-upon interest. The home or real estate purchased serves as collateral, meaning the lender can seize it if the borrower fails to pay back the mortgage.
Mortgages can have two main types of interest: fixed-rate and adjustable-rate. There is also a third option, not very common, called an interest-only mortgage.
Fixed-rate mortgages have an interest rate that does not change for the entire duration of the loan. This means that as a borrower, you will make the same monthly payment until you have finished paying off your mortgage.
Because the amount borrowed is paid in equal monthly installments, the longer the mortgage term, the lower the sum you need to pay per month. However, this also translates to higher interest rates, which decrease with shorter-term mortgages.
It is useful to know that at the beginning of the mortgage, a larger part of the monthly payments goes toward the repayment of the interest, rather than the principal (the amount borrowed). As the interest gets paid off, more of the monthly payment will go toward the principal.
In adjustable-rate mortgages, the interest rate can vary throughout the duration of the loan. The conditions under which the interest rate changes are specified when getting the mortgage. There are limits to how often the interest rate can change and how much, and borrowers should familiarize themselves with these conditions before signing a mortgage agreement.
Adjustable-rate mortgages usually have a lower interest rate in the first years, but this will later increase. The increase is usually determined by an index, meaning a benchmark interest rate, which in the United States is regularly updated by the Federal Open Market Committee. The monthly payments are then divided between the interest rate and the principal, similarly to fixed-rate mortgages.
Interest-only mortgages, like the name suggests, are mortgages that allow the borrower to pay only interest for the first years. This type of mortgage usually comes into play when the borrower intends to sell the real estate before the monthly installments get higher.
However, an interest-only mortgage is a risky option, as it does not allow the borrower to build up any equity in the home. If the market changes and the house loses value, the borrower risks having to sell it at a lower price and ultimately owing more money.
Whether fixed or adjustable, the interest rate on a mortgage depends on several factors. The size and term of the loan are two significant factors, but there are also others within your control. Your credit score and the down payment for the purchase of the house will impact the interest rate, such that having a higher score and making a bigger down payment will lead to paying a lower rate.
Mortgages can have two main types of interest: fixed-rate and adjustable-rate. There is also a third option, not very common, called an interest-only mortgage.
Fixed-rate mortgages have an interest rate that does not change for the entire duration of the loan. This means that as a borrower, you will make the same monthly payment until you have finished paying off your mortgage.
Because the amount borrowed is paid in equal monthly installments, the longer the mortgage term, the lower the sum you need to pay per month. However, this also translates to higher interest rates, which decrease with shorter-term mortgages.
It is useful to know that at the beginning of the mortgage, a larger part of the monthly payments goes toward the repayment of the interest, rather than the principal (the amount borrowed). As the interest gets paid off, more of the monthly payment will go toward the principal.
In adjustable-rate mortgages, the interest rate can vary throughout the duration of the loan. The conditions under which the interest rate changes are specified when getting the mortgage. There are limits to how often the interest rate can change and how much, and borrowers should familiarize themselves with these conditions before signing a mortgage agreement.
Adjustable-rate mortgages usually have a lower interest rate in the first years, but this will later increase. The increase is usually determined by an index, meaning a benchmark interest rate, which in the United States is regularly updated by the Federal Open Market Committee. The monthly payments are then divided between the interest rate and the principal, similarly to fixed-rate mortgages.
Interest-only mortgages, like the name suggests, are mortgages that allow the borrower to pay only interest for the first years. This type of mortgage usually comes into play when the borrower intends to sell the real estate before the monthly installments get higher.
However, an interest-only mortgage is a risky option, as it does not allow the borrower to build up any equity in the home. If the market changes and the house loses value, the borrower risks having to sell it at a lower price and ultimately owing more money.
Whether fixed or adjustable, the interest rate on a mortgage depends on several factors. The size and term of the loan are two significant factors, but there are also others within your control. Your credit score and the down payment for the purchase of the house will impact the interest rate, such that having a higher score and making a bigger down payment will lead to paying a lower rate.
