Article | 2:24 min read

Mortgages 101: Understanding the Basics

Homeownership

Planning for a future home should be exciting, but thinking about mortgages can be an overwhelming experience. You’re not alone, so let’s understand the mortgage process together!

A couple being handed the keys to their new home

Mortgage Definition:

In simple terms, a mortgage is a loan that is used to finance your house. In order to secure the loan, you have to enter into an agreement with a lender, or bank. The mortgage lender will give you the loan as cash up front, which you will then pay back over a set time span until the loan is paid in full.

What are the Components of a Mortgage?

There are five parts to a mortgage: collateral, principal, interest, taxes, and insurance. Here's a breakdown:

  1. Collateral:

When you enter into the legal agreement with a mortgage lender, your house is used as collateral for that agreement. If you fail to pay back the loan, the bank can actually take your house back through a process called foreclosure.

  1. Principal:

The amount of money that the bank lets you borrow is known as the principal. To lower your home loan's initial principal amount, you can apply more of your funds to the purchase price of the home, referred to as a down payment.

  1. Interest:

The lender charges you for borrowing money, which is called interest. This cost is typically expressed as a percentage, known as the interest rate, and is influenced by current mortgage rates. Principal and interest will make up most of your monthly payments, gradually reducing your debt over a fixed period of time.

  1. Taxes:

When you buy a home, the local community collects taxes based on a percentage of the home's value. These taxes usually go to helping the community with education, roads, and more.

  1. Insurance:

Just like you have health insurance to cover you when you are sick, lenders will require you to buy home insurance. This insurance typically covers natural disasters, fire, theft, etc.

Understanding how all of these components intersect makes understanding mortgages easier.

Are There Different Types of Mortgages?

Yes! The two most common types of mortgages are fixed-rate mortgages and adjustable-rate mortgages. Here's a breakdown:

Fixed-rate Mortgage:

Remember interest rate? With a fixed-rate mortgage loan, that interest rate is fixed, meaning it stays the same until the loan is paid off. Each monthly principal and interest payment will be equal for the length of the mortgage. Fixed-rate home loans are a standard mortgage option offered by many mortgage lenders.

Adjustable-rate Mortgage:

Adjustable-rate mortgage (ARM) will keep the same rate for a period of time at the beginning of the loan, then adjust yearly based on current market conditions.

More than likely, your lender will have multiple loan plans. Make sure you speak with them to choose the right one for you.

You’ve learned the basics about mortgages, so what’s next? Now it’s time to learn about the mortgage process! No matter the loan, do your homework and find the right mortgage lender for you! Stop by any of our locations to chat about your options or visit the Mortgage Center on our website.

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The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its subsidiaries and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.