Mortgages December 2023

Mortgage Types

Mortgages come in different forms, categorized as follows:

• Conventional mortgage: a type of mortgage that is not insured or guaranteed by the government. It is typically offered by banks and other private lenders and is available for a wide range of property types. Conventional mortgages are often used by borrowers with good credit who can make a large down payment on their property. They generally have lower interest rates than government-insured mortgages, but the qualification requirements are often more stringent. Conventional mortgages can be either fixed-rate or adjustable-rate, depending on the terms of the loan.
• Fixed-rate mortgage: is characterized by a fixed interest rate and payments that don't change over the life of the loan.

• Adjustable-rate mortgage (ARM): has an interest rate that may change periodically, but payments remain constant.
• Interest-only mortgage: allows you to pay only interest for a period, after which you must start paying both interest and principal.
• Balloon-payment mortgage: this type of mortgage requires you to make large periodic payments until the final payment, which is a large sum due at once.
• Jumbo mortgage: this type of mortgage has high loan limits (~$600k) and is typically available for people with a high credit score.

There are also government-insured loan types designed for specific situations, such as FHA, VA, and USDA loans. Check our in-depth guide to mortgage types here.

Mortgage Costs

The cost of a mortgage refers to the total amount of money that a borrower will pay over the life of the loan. This includes the principal amount of the loan, as well as the interest and any fees or charges associated with the loan. The total cost of a mortgage can vary depending on the interest rate, the term of the loan, the size of the down payment, and the borrower's credit score. In general, a mortgage with a lower interest rate and a shorter loan term will have a lower overall cost than a mortgage with a higher interest rate and a longer loan term. It is important for borrowers to carefully compare the costs of different mortgages before choosing the one that is right for them.

The total cost of a mortgage can be broken down into several different important factors:

• Size of Loan
• Interest Rate
• Closing Costs
• Annual Percentage Rate (APR)
• Type of Interest Rate (fixed or adjustable)
• Loan Term (Number of Years)
• Penalties and Additional Fees

What Do Mortgage Payments Cover

A mortgage payment primarily consists of the following:

• Principal and interest: At the start of your loan, most of your monthly payment usually goes toward the interest. As you start paying down the balance, more of your payment will go toward the principal.
• Property tax: Homeowners need to pay property taxes, which are based on the home’s value. This amount is typically tacked onto your monthly payment and put into an escrow account until the taxes are due.
• Homeowners insurance: It’s required to have insurance on your property. Common insurance options include fire, theft, wind, earthquake, and other hazard protection.
• Private mortgage insurance (PMI): You may have to get PMI if you take out a conventional mortgage loan with less than 20% down.

Before taking out a mortgage, use a mortgage calculator to determine the total and monthly cost of the loan. You can also check the amortization schedule, which breaks down your payments over the life of the loan.

Average Mortgage Rates:

Last update: 12/05/23

What Do Mortgage Payments Cover?

A mortgage payment is composed of several components, as discussed below:

• Principal - This refers to the original amount that was distributed from the loaner to the borrower. As you continue making your monthly payments, the mortgage principal reduces.
• Interest - The money that a bank or any other financial institution gains from lending you money and is usually paid monthly.
• Property Tax - Homeowners must pay these taxes and they are computed based on the value of the home. A portion of these taxes is collected by lenders and they retain the funds in an escrow account until they are due.
• Homeowners Insurance - A financial protection against property damage by fire, wind, theft, among other hazards. Varies by location.
• Private Mortgage Insurance - Private Mortgage Insurance is most common in traditional mortgage lenders and is used to back up the lender in case one defaults on the loan payments. It seems like it mostly applies when a homebuyer puts down less than 20% of the home’s purchase price.

How to Qualify for a Mortgage

In order to qualify for a mortgage, here’s what you’ll typically need:

• Minimum income and income verification
• Proof of employment
• 2+ years of consecutive employment history
• Good credit (depending on the mortgage type)
• Minimum down payment (depends on the mortgage type)
• Proof of assets and liabilities
• Maximum debt-to-income ratio

There are several ways to increase your approval odds for a mortgage, such as paying a higher down payment or having excellent credit. Paying down other debts and fixing any errors on your credit report may also boost your ability to get a loan.

If you’re not sure what you qualify for, consider getting prequalified for a mortgage loan. Prequalification lets you check your potential rates, terms, and loan amount with different lenders without affecting your credit score.

Or, if you’ve already found a lender and are ready to start the process of getting a mortgage, consider preapproval. This process typically requires things like a credit check and income verification. Once pre-approved, the lender will send you a letter with more specific details about the loan you could get.

What Is Mortgage Refinancing?

Mortgage refinancing is the process of getting a new mortgage to pay off and replace the old one. Many people decide to refinance because they get to take advantage of current and potentially lower interest rates. In some other cases, homeowners will refinance to get into a different type of mortgage, like switching from an adjustable rate to a fixed rate type of mortgage.

If you already have a mortgage, continue learning about how refinancing can be a better option for you.

In Conclusion

A mortgage is a secured loan people get to help them purchase or refinance a property. These loans come with various requirements and potential fees — such as interest charges and closing costs. There is a lot of information to cover and consider before closing on a mortgage. We encourage you to use a mortgage guide as a reference for clear, concise, and relevant information at every stage of the mortgage loan process.