Home Mortgages 101
A home is the largest purchase that most people will make in their lifetime. It’s important to understand how mortgages work to find the right type of mortgage to purchase or refinance a home. Here are some important facts to know about mortgages as you prepare to purchase or refinance a home.
What is a Mortgage?
A mortgage is a loan you take to finance the purchase of or to refinance a home. While you technically own your home, the bank will place a lien on it until the mortgage is paid off. Mortgages come in all shapes and sizes, but there are a few key terms that are associated with every mortgage:
The down payment is the amount of money paid out of pocket toward the home.
This is the amount of money that you borrow from the bank to purchase your home (the original mortgage amount). This is calculated by subtracting your down payment from the purchase price of the home.
This is the amount of money your lender will charge you over the life of your loan, which is determined by your interest rate. The higher your rate, the more you pay for your loan.
The term is the length of time you’re borrowing from the bank - typically 15-30 years for a mortgage.
Personal Mortgage Insurance (PMI)
PMI is a monthly insurance premium that is added to your payment until you have 20% equity in your home. PMI provides your lender with protection in the event you stop making your mortgage payments. The best way to avoid PMI is to put at least 20% down when you finance your home.
If you stop paying the loan, the bank will foreclose (repossess) your house, and sell it on the open market to recoup their losses.
Common Types of Mortgages
There are two main types of mortgages: fixed-rate mortgages and adjustable-rate mortgages (ARM).
Fixed-Rate Mortgage Loans
A fixed-rate mortgage is the type of mortgage that most consumers use to purchase a home. A fixed-rate mortgage has a locked interest rate, which means the monthly payment is the same each month for the duration of the mortgage. Typically, a fixed-rate mortgage is amortized over a 15-30 year period, with your monthly payment paying down both principal and interest on your loan.
Adjustable-Rate Mortgage Loans
Adjustable-rate mortgages (ARMs) are loans with a variable interest rate. The initial term of an ARM is typically lower than a fixed rate, but for a short window of time. After the ARM window expires, the rate will then adjust to the current market rates and remain variable for the life of the loan. For example, a 5/1 ARM provides a fixed interest rate for the first 5 years. In year 6, the interest rate will adjust to current rates and continue to change for a long as you have the mortgage. ARMs are typically used for short term financing by real estate investors who buy and flip real estate or for homeowners who expect to sell or refinance before the ARM window expires.
Which Mortgage is Right For You?
With so many options for buying a home, it’s important that you educate yourself before choosing your mortgage. Making the wrong decision could cost you more money in the long run, which is why it’s important to speak to an experienced mortgage loan professional who will guide you through your options when you’re shopping for a home.
KEMBA Offers Competitive Mortgages
KEMBA offers both adjustable and fixed-rate mortgages with terms and interest rates that are competitive with traditional lenders, but with one-on-one service to help you select the right loan. For more information on our mortgage options or to find out more about our mortgage refinance options, call 614.235.2395 and select Option 2 to speak to one of our local associates about mortgages at KEMBA.