Home Mortgage Essentials

To understand home mortgages, you only need to familiarize yourself with a few basic concepts and terms. We’ve compiled this guide to the basics of home mortgages to help you in the application process.

Interest Rates, Fees, & Points

When you are shopping for home mortgages, you want to make sure you always look at total cost, rather than fixating on one number (such as the monthly payment). The interest rate, loan fees, and discount points are the primary variables that will affect the total cost of your home mortgage. All of these expenses that determine the cost of your loan are reflected in the APR, or annual percentage rate.

Discount points. Discounts points let you “buy” a lower interest rate when you close. One point represents 1% of your loan amount. The more points you pay, the lower your interest rate and monthly payments will be. The individual features of your loan will specify how much you can decrease your rate with each point you buy.
Interest rates. This is a percentage of the outstanding loan amount. An interest rate represents the cost of borrowing or the amount you will pay your lender each month for the convenience of borrowing. Three factors will influence your interest rates: your credit history, the current market, and the features of your loan.
Fees. These are costs that you will pay up-front on home mortgages. Such costs might include processing, origination, and closing fees. Origination points are loan fees that equal 1% of the loan amount.

Monthly Payments on Home Mortgages

Taken as a whole, mortgage payments can be complex. To simplify them, we’ve broken your monthly mortgage payment down into four components: principal, interest, taxes, and insurance. Here is brief explanation of each:

Principal. Principal is the actual amount you borrow with your home mortgage. Principal also refers to the outstanding balance on the mortgage at any point.
Interest. As we explained before, interest represents the cost of borrowing money. How much interest you will pay monthly is determined by your interest rate.
Taxes. Though taxes are assessed by the government, they are usually collected by your mortgage lender in your monthly payment. The lender then pays the government on your behalf every six months to one year, which is called escrow.
Insurance. This is also usually collected by your lender as part of your monthly payment. Like taxes, your insurance will be taken out of an escrow account. The two parts of insurance are homeowner’s insurance and mortgage insurance. Your lender may require you to pay one or both of these types of insurance, depending on the terms of your loan.

Now that you have a guide to mortgages, make sure you ask these mortgage questions to your lender.