Understanding Mortgages

What is a Mortgage?
What is in a Payment?
Should you Refinance?
What is FICO Score?
How to ensure accuracy on Credit report
How do I raise my Credit Score?
Fixed vs Adjustable MortgagesWhat are the Closing Cost on a Purchase?
What is a Jumbo Loan?
Complete Mortgage Glossary
Frequently Asked Questions (FAQ)

What is a Mortgage?

A mortgage is basically a long-term loan that you arrange through a bank or other financial institution or even through the seller of the property. The house and/or property serve as collateral for the loan.
A home mortgage is most likely the largest debt you will assume. You typically pay off that debt in monthly payments over a long period of time, most often 15 to 30 years.

What is in a Payment?

A monthly mortgage payment typically includes the following, known as PITI:

Principal
Interest
Real estate Taxes
Property Insurance — and, often, private mortgage insurance, known as PMI — gives the lender protection if the homeowner should default on the loan. The mortgage company charges insurance if the down payment is less than 20 percent of the sale price or appraised value. PMI usually can be eliminated once the principal balance of the mortgage reaches 80 percent of the sale price or appraised value, which is known as the loan-to-value (LTV) ratio.

The process of paying the principal takes years because mortgages are based on a repayment plan called amortization. During the years of the mortgage, a homeowner pays a lot of money toward interest in order to have manageable monthly payments on the huge house debt. During the first few years, most of the mortgage payments will be applied toward the interest. During the final years of the loan, the payments will be applied primarily to the remaining principal.

Example
Let's look at a $100,000 mortgage at a fixed interest rate of 7.5 percent for 30 years. In three decades, the homeowner would pay $151,717 in interest. Of course, you cannot put a price on the pleasure of living in your own home and building equity, an unencumbered interest in your property. Equity grows as you pay off the principal of the mortgage and as the property appreciates in value. Also, there are tax incentives because mortgage interest is a deduction on your federal income tax. Still, the amount of interest you will pay may affect your decision on what type of mortgage you choose.

Should you Refinance?

Refinancing can be worthwhile, but it does not make good financial sense for everyone.
A general rule of thumb is that refinancing becomes worth your while if the current interest rate on your mortgage is at least one percentage point higher than the prevailing market rate. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings. There are other considerations, too, such as how long you plan to stay in the house. Most sources say that it takes at least three years to fully realize the savings from a lower interest rate, given the costs of the refinancing.

Refinancing can be good for homeowners who:.

Want to get out of a high interest rate loan to take advantage of lower rates. This is a good idea only if you intend to stay in the house long enough to make the additional fees worthwhile.
Have an adjustable-rate mortgage (ARM) and want a fixed-rate loan to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan.
Want to convert to an ARM with a lower interest rate or more protective features (such as a better rate and payment caps) than the ARM they currently have.
Want to build up equity more quickly by converting to a loan with a shorter term.
Want to draw on the equity built up in your house to get cash for a major purchase or for your children's education.