Three Elements of a Mortgage
All mortgages have three elements: Loan type, rate, and the term. If you know how these three pieces work together, it can help you choose the best mortgage for your situation.
A mortgage’s type depends on if a government agency or private investor is involved, as well as the amount of the loan.
FHA loans are the easiest to qualify for because of the backing by the Department of Housing and Urban Development (HUD). The down payment required with FHA loans is lower at only 3.5% and it is easier to qualify borrowers with a lower FICO. FHA loans however can end up costing the borrower more money in the long run, however, because they are required to maintain mortgage insurance through the life of the loan. These loans are insured by the Federal Housing Administration (FHA), which means that lenders are protected against homeowners who default on their loan.
Conventional loans are a bit harder to qualify for, but typically cost less over the life of the loan compared to FHA loans. With a conventional loan, mortgage insurance is only required with loans above the 80% loan-to-value threshold, which can end up saving hundreds of dollars a month in mortgage insurance payments.
VA loans are only available to veterans, surviving spouses, and active-duty service members. VA loans have the advantages of no down payment or mortgage insurance.
Jumbo loans are mortgages that exceed the conventional loan limit. Simply put, if your loan is above $647,200, you will need a jumbo mortgage product.
There are two different rate types – fixed and adjustable – and you are able to choose the rate type that best matches your goals.
A fixed-rate mortgage will remain constant through the life of your loan. Your mortgage payment remains constant and predictable with a fixed-rate mortgage and is a great option for homeowners that intend to stay in their home for a long time and want the payment to remain the same.
An adjustable-rate mortgage will stay the same for the initial fixed-rate portion of the rate, either 5, 7, or 10 years. After that, your rate will adjust up or down once per year based on market conditions. An adjustable-rate mortgage generally offers the lowest rate possible and is a good choice for homeowners who plan on moving or refinance before the initial fixed-rate period ends.
The term is the length of the loan. Most common fixed-rate loan terms are 15 and 30 year, although Homewise Financial can offer loan terms ranging from 8 to 30 years. Adjustable-rate mortgages almost always have a 30-year term.
The Many Parts of a Monthly Mortgage Payment
Monthly payments are usually comprised of three portions: principal, interest, and escrow (which are generally lumped together into an escrow payment).
- Principal payments each month go towards paying down the balance of your loan. Money paid towards principal also add equity in your home.
- Interest payments each month go to the lender as a fee for allowing you to borrow the money.
- Your escrow payment is collected each month to cover the annual property tax and homeowners insurance. Escrow funds are collected with your mortgage payment and places into a special account which they use to pay your property tax and insurance when it becomes due. This account that the lender creates in your behalf is your money and any funds remaining after you payoff, sell, or refinance, are returned to you.