Mortgages 101: the fundamentals of home loans.

Mortgages 101: the fundamentals of home loans.

If you’re like most people, a mortgage is the largest loan you’ll take on during your lifetime. Buying a home is a huge decision, so it’s important to understand exactly what goes into a mortgage and what you’ll have to do to get one.

But let’s be honest; the mortgage process can be intimidating. Even more so if you’re going through it for the first time. So we’ll lay the groundwork for you and make the numbers behind a mortgage a little easier to understand. By learning more about how mortgages work, you’ll dramatically increase your odds of getting a mortgage that best fits your needs. And that’ll help give you the confidence you need to get into the home you want.

The Basics

A mortgage works much like any other loan: you borrow money from a bank or other lender and then pay it back every month. The duration of your loan varies; most people have 15-year or 30-year mortgages.

Your monthly payment goes toward paying off several pieces of your mortgage:

  • The principal balance, which is the amount of money you borrowed
  • Your mortgage's interest, which is how lenders make money on your loan
  • Your annual property taxes and homeowner’s insurance premiums, depending on the arrangement you made with your mortgage lender

Types of Mortgages

The two most popular loan types are the 30-year fixed-rate mortgage and the 15-year fixed-rate mortgage. The interest rate attached to these loans never changes. The monthly payment for a 30-year fixed-rate mortgage is typically lower than on a 15-year fixed-rate mortgage because payments are spread out over a longer number of years. However, 15-year fixed-rate mortgages typically come with lower interest rates, which means you’ll pay less interest during the life of the loan.

You can also choose an adjustable-rate mortgage. The interest rate on these loans changes during the course of your loan. Often, the loan will have a fixed rate for a certain number of years, say five or seven. The rate will then adjust based on a host of economic conditions and could either go up or down.

The benefit of an adjustable-rate loan is that the initial interest rate is usually lower than a traditional fixed-rate loan. The risk, though, is that the rate could rise significantly after the fixed period ends.

Escrow Accounts

When you buy a home, you'll have to pay property taxes and you'll also need to purchase homeowner's insurance. Homeowners have the choice to either pay these fees on their own or lump them into their monthly mortgage payments and have their lenders pay them on their behalf.

The second option is an escrow account. Consider property taxes: If your property taxes are $6,000 a year, you can either pay this figure in a lump sum or you can add $500 a month into your monthly mortgage payment. Your lender will then put this money into an escrow account -- which is an interest-bearing account -- and dip into it to pay your property tax bill when it is due. It’s a good option for homeowners who do not want to save the large amount of money they'd need each year to cover their property tax bills.

Have other questions about mortgages? Talk to one of the experienced mortgage loan officers at Liberty Bank—we’re here to help guide you through the process.


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