What is a Mortgage: Understanding the Definition, Rates and Types

If you’re getting ready to purchase a home, you’ll need to understand mortgage basics first. Here at LendingMan, we simplified the loan learning process by breaking down everything you need to know about mortgages.

What is a mortgage?

Put simply, a mortgage is a home loan. Used when buying or refinancing a home, mortgages allow buyers to make payments on their home instead of providing full cash at purchase.

Mortgages deal strictly with property purchases and are considered “secure loans.” Because a home purchase requires a hefty loan, lenders look for insurance on their investments. Unlike traditional loans, a simple agreement to repay the amount won’t satisfy mortgage requirements. Instead, failure to repay your mortgage payments can result in losing your home to the lenders under foreclosure.

Understanding mortgage rates

Mortgage rates refer to the interest associated with your mortgage loan. Your loan will either fall under a fixed-rate mortgage or an adjustable-rate mortgage. Your mortgage rate can depend on a variety of factors, including current market standings, the amount of time in which you agree to pay back your loan, property value, your credit score and downpayment amount.

Fixed-rate mortgage

A fixed-rate mortgage keeps a standard interest rate for the lifetime of your loan. While your interest rate stays the same, your monthly payments will still fluctuate over time due to amortization.

Under amortization, your loan is divided into the amount you owe lenders in interest and the principal amount or the purchase price of your home. As you get closer to paying your loan off, the principal rate will slightly increase. However, a fixed-rate mortgage protects homeowners from interest market hikes that can make monthly payments increase dramatically.

Adjustable-rate mortgage

On the other hand, an adjustable-rate mortgage determines interest rate by the current market standings. Under an adjustable-rate mortgage, your interest will stay the same for an agreed upon number of years and then fluctuate according to the market. This may be one year, five years, seven years or 10 years.

The upside to adjustable-rate mortgages is that they usually start off with a lower interest rate, allowing for more of your initial monthly payments to go towards your home’s principal amount. On the downside, the variable nature of the housing market can cause your interest rate and monthly payment amount to jump once it is no longer protected by a fixed interest amount.

Common types of mortgage

Listed below are some of the common types of mortgage loans available.

30-year mortgage

The 30-year mortgage is the most common option for homebuyers. Its longer repayment period allows for lower monthly payments with a fixed interest rate.

15-year mortgage

Cutting the repayment period down by half, the 15-year fixed-rate mortgage deals with higher monthly payments. However, more of your money is spent going towards the principal amount instead of accruing interest.

Adjustable-rate mortgages

Adjustable-rate mortgages vary because they account for multiple factors and market changes. Borrowers and lenders can decide on the time between interest-rate adjustments and caps on monthly payments. While less predictable than fixed-rate options, adjustable loans can benefit homeowners who project the market will improve in the future.

Government-backed mortgages

Government-backed mortgages include FHA loans for buyers with lower credit scores or down payments, VA loans which waive down payment and insurance requirements for military members and veterans and USDA loans issued by the Department of Agriculture.

Now that you better understand your mortgage choices, you can work on getting financially prepared for a mortgage loan and researching which lender options are best for you.

For personalized mortgage rates, visit our experts at lendingman.com.