Almost all of us will have a mortgage during our lifetimes, and many of us with buying new houses and refinancing will end up with many different mortgages. Home mortgages let us buy one of the most expensive things most of us will ever purchase: our homes. These loans can help make the American dream of home ownership possible.
One of the most important factors of a mortgage can be the interest rate. Interest rate on a mortgage can make a huge difference on the amount you pay each month. For example: A $200,000 mortgage for 30 years at 4% would be about $955 per month, while a similar mortgage at 5% interest would be over $118 more per month, and result in over $42,000 of additional interest being paid over the life of the loan. The term of the loan can also make a big difference. The same $200,000 loan for 30 years at 4% that was $955 per month, if changed to a 20 year mortgage would cost $257 more per month, but save over $52,000 over the life of the loan. This brings to light another critical part of the loan, how much it costs each month. This can be the biggest deciding factor on how much of a loan you can afford in your budget.
Mortgages generally have upfront costs as well, refereed to as closing costs. They can include points (a percentage cost based on the size of the loan), documentation fees, underwriting fees, and the list goes on. These costs can easily be $2,000 to $5,000, for some loans. Also many mortgages will require at least 10% (if not more) of the cost of the home be paid by the purchaser. All of this can add up to a considerable amount of money that the buyer needs upfront to purchase a home.
Mortgage refinancing can be a helpful way to decrease your interest rate, adjust the term of your loan. As interest rates drop, or as your circumstances change, refinancing may be able to help you save some money and/or decrease your monthly payment. As with mortgages, there are generally closing costs to refinance, but in some cases the added up front cost may save you money in the long run if you keep the mortgage long enough.
There are a few basic mortgages types that are common. Fixed rate mortgages are probably still the most common mortgage people use. Loans are generally for 15, 20 or 30 years, and allow you to lock in your monthly payment amount for the life of the loan. Adjustable rate mortgages (ARM) are also very common, and generally have a fixed interest rate for the first few years, then the interest rate can fluctuate based on the market. Generally ARMs have lower interest rates than a comparable fixed rate mortgage, because the borrower has greater risk once the fixed rate period ends.