An introduction to mortgage.
Here's some basics about mortgages: what they are, how they work.
Definition. A mortgage is simply a loan you take out to buy a home. Obtaining a mortgage will let you purchase a $200,000 home though you have far less money to put toward such a large purchase.
After saving and paying a down payment (e.g. 20% of the total cost of the home), you borrow from a lender the remaining amount. Loans for homes are usually repaid in monthly payments over a 30-year period.
Fixed-rate mortgages. There are many mortgage options, but two typical types include 15-year and 30-year fixed-rate mortgages -- with the 30-year being more common. Fixed-rate means that the interest rate does not change during the course of the loan. If the rate is 7.75% at the beginning of the loan period, it will still be the same at the end.
Repayment rate. On a 30-year fixed-rate loan, it takes almost 22 years to pay off half of the loan balance. During the early years of repaying your mortgage, most of your payment goes toward the interest on the money you borrowed.
A typical example. Consider a fairly typical example: A home is on the market for $200,000. A down payment of 20% reduces the amount of the loan by $40,000 to $160,000. A 30-year fixed-rate mortgage is obtained. The interest rate is 7.75% -- resulting in 360 monthly payments of $1146 each.
Note: See our Mortgage Calculator to figure out the monthly payments on other loan amounts.
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