Chris Gmyr

A mortgage is loan offered by a lender for the purpose of buying property. The word comes from the old French word ‘mort’, which means deed, and ‘gage’, the old English word for pledge. A lender provides the money for your home purchase after you sign several documents stating that you will pay the lender back, plus a hefty amount of interest. If you fail to pay, the lender gets your home in exchange for the amount you still owe.

There are several types of mortgages, but most fit into one of two categories. Adjustable rate mortgages start off with a low interest rate; this rate might stay the same for the first six months to a year or two, depending on the terms of your mortgage. After that, you’ll be paying interest rates based on whatever the current market rate is. It might start out low, at 4% or even less in some cases, but can go up to three or four times that amount during the course of the loan. It depends entirely on what the current interest rates are at any point and time.

With a fixed rate mortgage, the rate you sign up for is the rate you have throughout the length of your loan. If you sign up now at 5.5%, you will be paying that same rate 20 years from now, as long as you don’t refinance your loan. If you are staying in your home for longer than five years, a fixed rate mortgage is often your best option.

Most lenders want 20% of the home’s purchase price as a down payment, not counting fees and closing costs. If you cannot provide that amount, you will have to pay private mortgage insurances (PMI) until you have paid that 20%. If you have good credit, you may qualify for an FHA loan with only 3.5% down. Buyers with poor credit will be asked to pay 10%.

When you refinance a loan, you are taking out a second mortgage to pay back the first. Refinancing a mortgage allows you access to your equity; it also gives you a chance to get a better interest rate. If interest rates have dropped significantly since you took on your mortgage, or if your credit rating has greatly improved, refinancing might be a good way for you to lower your monthly payments.

When you first take out a mortgage, most of your monthly payments are paying off interest. As you continue to make payments, the amount of interest paid drops down, and by the end of your loan, you are paying almost entirely on the home itself, known as the principle. This is known as amortization. It’s frustrating to see the amount you owe on the home barely decreasing as you make your first several payments, but you will eventually pick up speed (as principle payments go up and interest payments go down) and start seeing a sizable dent in the amount you owe.

Mortgages can be very confusing, especially for a first time home owner. Make sure you are working with a lender that will happily answer all of your questions, in a way you can understand, and don’t hesitate to ask. It’s always better to ask too many questions than to walk away confused and unsure of what you’re agreeing to when you accept a mortgage.