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A Buyer's Guide to Understanding Your Mortgage

A Buyer's Guide to Understanding Your Mortgage

When you are considering buying a home, it is easy to think about things like what style of home you like, how many rooms you need and what parks or other entertainment options might be nearby. However, it is not always easy to consider one of the most important parts of the home-buying process: the mortgage.

Of course, the mortgage payment is the monthly bill that keeps a roof over your head, but there is much more to it. In fact, that monthly house payment is made up of three primary parts: mortgage, taxes and insurance.




When it comes to types of mortgages, buyers have options. Term mortgages typically allow borrowers 15 or 30 years to pay off their homes. A longer mortgage means a lower payment, but it also means higher interest costs.

Speaking of interest, term mortgages offer fixed interest rates; but, adjustable-rate mortgages (the ARM!) often start out with a lower interest rate that may fluctuate over the term of the loan. These two types of conventional loans are not the only options for home buyers, either. There are several alternative loan options, too.




For today’s home buyers, lenders build in an “escrow account.” Part of the monthly mortgage payment goes into this account to cover property taxes and school taxes. Basically, mortgage servicers make sure there is enough money in the escrow account, so when it is time to pay taxes, the lender pays them for you out of that account.


Homeowners Insurance


Homeowners insurance is also paid out of the built-in escrow account. However, some lenders also require buyers to purchase another type of insurance, private mortgage insurance or PMI. If a buyer puts down less than 20% of a home’s selling price, mortgage servicers may require them to pay PMI, which protects the lender if the buyer cannot repay the loan. PMI is typically built in to monthly payments.

So, that “roof over your head” monthly mortgage payment consists of much more than your home’s purchasing price. Now that you understand the different types and parts of mortgages, it is important to make sure you can afford the mortgage for the house you want. Luckily, there are several ways to be sure before you make an offer on a new home.

If you pre-qualify for a mortgage though a lender, you will know exactly what price range you should be shopping in. Then, there will be no surprises when that first payment is due. Plus, sellers LOVE pre-qualified buyers… they know you mean business!

Other tools, like mortgage income calculators and mortgage qualification calculators can help you understand your debt-to-income ratio before you apply for a loan. The bottom line for home buyers? Know what you’re paying for and make sure you can afford to pay for it!

Learn more about the types and parts of a mortgage here: