A Beginner’s Guide to Mortgages
One of the more daunting aspects of purchasing a home is the whole concept of a mortgage. It’s this foreign idea that can seem quite terrifying if you don’t know the ins-and-outs of some of the major players. We’ve decided to compile a little list of some well-known mortgage terms and break them down as a beginner’s guide to mortgages.
What is a Mortgage?
Let’s start with the basics. A mortgage is defined as a loan given to you (usually from a bank) to help pay for a home. It’s generally recommended that you borrow 80% or less of the value of the house.
A down payment is the amount that you contribute to the purchasing of the house, in comparison to how much the bank lends you. Down payments are typically described in terms of percentages. For example, if the home costs $100,000 and you “put 20% down,” then you put $20,000 towards the house and the bank gave you an $80,000 mortgage. The average down payment is roughly 3%. The percentage could fluctuate depending on your credit score/history and the house you’re interested in.
There are five components to a mortgage:
- Principal (total amount borrowed to buy the house)
- Interest (“the price you pay to borrow money” from the bank or another lender)
- Property Taxes (calculated based on the value of the home and property)
- Mortgage Insurance (homeowners insurance and potentially a PMI, which will be discussed in a moment)
- Mortgage Note (This is a legal document that says you will repay the balance of your mortgage, including interest and any other costs, in a certain amount of time; the breaking of this note could lead to a foreclosure, where the bank repossesses the home and sells it.)
15- versus 30-Year Mortgage
Although the 30-year mortgage is the more common plan, the 15-year mortgage provides many benefits. They “generally have lower interest rates” and you pay off the mortgage in a faster window of time. It’s a good idea to speak with your lender about all the options and compare them to your budget.
Fixed or Adjustable/Variable Mortgage
The fixed or variable aspect of a mortgage refers to the interest structure. A fixed-rate means that the interest stays the same during the entire length of the mortgage. If you start with an interest rate of 3%, then that will remain 3% for as long as it takes for you to pay off the mortgage (or during the agreed upon time). This is the more common option.
On the other hand, an adjustable or variable rate mortgage has a “lower, fixed interest rate” for a certain period of time (say maybe five years), then the “rate and monthly payment can change
You can use this beginner’s guide to mortgages as your compass for preparing to buy your first home. If that first home happens to be in the Savannah market then we’d love to show you around to find your perfect home.