A Brief Guide to Mortgages

By information.com — Published September 19, 2017

A Brief Guide to Mortgages

What is a mortgage?

A mortgage is a loan provided by a lender to help you finance the purchase of a residential property. The house serves as collateral for the loan amount, and mortgage payments are usually paid on a monthly basis. The payments comprise of the interest, principal, insurance and taxes. The insurance component includes homeowner's insurance, which provides financial protection in the event of an accident or disaster involving your house, and mortgage insurance, which you will be required to pay if your downpayment is less than 20%.

The legal documents you sign when getting a mortgage is known as a mortgage note, a written promise to repay the due amount at a specific rate of interest over the agreed-upon time period. In the event that you default on your mortgage payments, your lender can initiate a foreclosure process to sell your home and recover the money.

  • A fixed rate mortgage is one where the rate remains the same throughout the length of the loan (10, 15 or 30 years). It makes up more than 75% of all home loans.
  • In an adjustable rate mortgage, the rate remains fixed (usually at a lower rate than a comparable fixed-rate mortgage) for a specific period at the beginning of the loan, and is then periodically adjusted at preset intervals. If the rate adjusts downwards, your payments will be lower and vice-versa.

Reasons to finance your home purchase with a mortgage

A mortgage is particularly advantageous in a low interest rate environment. When mortgage rates are at historical lows and the 30-year fixed mortgage rate is under 4%, home ownership becomes a lot more viable for the average borrower.

Unless you're a multi-millionaire, it doesn't make sense to invest a large portion of your cash savings into an illiquid asset such as property. You have the opportunity to invest and grow your money in the stock or bond markets.

In many cases, mortgage payments are tax deductible. You can deduct interest paid on your first and second mortgage up to $1,000,000 in mortgage debt and $500,000 if you're married and filing separately.

When you're looking for a mortgage online, it helps to be aware of the criteria that lenders evaluate. They include your credit score, employment stability and income, debt-to-income ratio and downpayment. You should aim to pay down over 20% of the home's purchase price to get the best mortgage rates and save more money in mortgage insurance premiums and interest payments over your loan's lifetime.

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