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% |
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.
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 |