A is likely the largest loan you'll ever take. Understanding how they work can save you tens of thousands.
Mortgage Basics
A mortgage is a loan to buy property. The property itself is collateral—if you don't pay, the bank takes it.
Key terms:
| Term | Meaning |
|---|---|
| Principal | The amount you borrow |
| What you pay to borrow | |
| Term | Length of loan (usually 15 or 30 years) |
| Amortization | How payments are split between principal/interest |
| Equity | What you own (home value minus what you owe) |
Types of Mortgages
Fixed-Rate
- never changes
- Payment stays the same for 15 or 30 years
- Most popular, most predictable
Adjustable-Rate (ARM)
- Lower initial rate (5/1, 7/1 ARM)
- Rate adjusts after initial period
- Risky if rates rise, good if you'll move soon
Government-Backed
| Type | Best For | [[down payment]] |
|---|---|---|
| FHA | First-time, lower credit | 3.5% |
| VA | Veterans/military | 0% |
| USDA | Rural areas | 0% |
Pro Tip
For most first-time buyers, a 30-year fixed is the safest choice. You can always pay extra to shorten it.
How Payments Work (Amortization)
Early payments are mostly interest. Late payments are mostly principal.
$300,000 loan at 7% for 30 years:
| Year | Payment | To Interest | To Principal |
|---|---|---|---|
| 1 | $1,996/mo | $1,750 | $246 |
| 15 | $1,996/mo | $1,100 | $896 |
| 30 | $1,996/mo | $14 | $1,982 |
You pay the same amount but the split changes dramatically.
Watch Out
This is why the first few years feel like you're "paying rent to the bank." You're barely touching the principal.
15-Year vs. 30-Year
| Feature | 15-Year | 30-Year |
|---|---|---|
| Monthly payment | Higher | Lower |
| Interest rate | Lower (~0.5%) | Higher |
| Total interest paid | Much less | Much more |
| Flexibility | Less | More |
$300,000 at 7% (30-year) vs 6.5% (15-year):
- 30-year: $1,996/month, $418,000 total interest
- 15-year: $2,613/month, $170,000 total interest
You save $248,000 with the 15-year... if you can afford the payment.
What Affects Your Rate
| Factor | Impact |
|---|---|
| 740+ gets best rates | |
| Down payment | More down = better rate |
| Loan type | Fixed higher than ARM initially |
| Term | 15-year lower than 30-year |
| Market conditions | The Fed, economy |
A 0.5% rate difference on $300k = $30,000+ over the loan.
The True Cost of a Mortgage
Don't just look at the house price. Your monthly costs include:
| Cost | Typical Amount |
|---|---|
| Principal & interest | $1,500-2,500 |
| Property taxes | $200-800 |
| Homeowners insurance | $100-300 |
| (if <20% down) | $100-300 |
| HOA (if applicable) | $100-500 |
| Maintenance (budget) | $200-500 |
| Total | $2,200-4,900 |
Do This
Get pre-approved before house hunting. You'll know your real budget and sellers take you seriously.
Red Flags to Avoid
Avoid This
- Buying at max approval amount
- Adjustable rates without a plan
- Interest-only loans
- Ignoring
- Not shopping multiple lenders
- Forgetting about taxes/insurance
Quick Win
Check your now. Every 20-point improvement can get you a better rate. Start fixing any issues at least 6 months before applying.