Mortgage Guide
Your comprehensive guide to understanding mortgages and the home buying process.
What Is a Mortgage?
A mortgage is a loan specifically used to purchase real estate. The property itself serves as collateral, meaning if you fail to make payments, the lender can foreclose and take ownership of the home.
Most mortgages have terms of 15 or 30 years, though other options exist. Your monthly payment typically includes principal, interest, property taxes, and homeowners insurance (often abbreviated as PITI).
Types of Mortgages
Fixed-Rate Mortgage
The most common type of mortgage. Your interest rate stays the same for the entire loan term, providing predictable monthly payments.
- Stable payments make budgeting easier
- Protected from rising interest rates
- 30-year terms have lower payments but more interest
- 15-year terms build equity faster with less interest paid
Adjustable-Rate Mortgage (ARM)
Starts with a lower fixed rate for an initial period (typically 5, 7, or 10 years), then adjusts periodically based on market conditions.
- Lower initial rates than fixed mortgages
- Good if you plan to sell or refinance before adjustment
- Payments can increase significantly after initial period
- Caps limit how much rates can increase
FHA Loan
Insured by the Federal Housing Administration, designed for first-time buyers and those with lower credit scores or smaller down payments.
- Down payment as low as 3.5%
- More lenient credit requirements (580+ score)
- Requires mortgage insurance for the life of the loan
- Loan limits vary by location
VA Loan
Guaranteed by the Department of Veterans Affairs for eligible military service members, veterans, and spouses.
- No down payment required
- No private mortgage insurance (PMI)
- Competitive interest rates
- Funding fee typically required (can be financed)
Understanding Down Payments
Your down payment is the upfront cash you pay toward the home purchase. It directly affects your loan amount, monthly payments, and whether you'll need to pay PMI.
Common Down Payment Amounts
- 3-5%: Minimum for many conventional and FHA loans
- 10%: Better rates and lower monthly payments
- 20%: Avoids PMI and gets best rates
- 20%+: Strongest position, lowest overall costs
While 20% down is ideal, many buyers successfully purchase homes with less. First-time buyer programs, FHA loans, and VA loans offer paths to homeownership with smaller down payments.
Private Mortgage Insurance (PMI)
PMI protects the lender if you default on your loan. It's typically required when you put down less than 20% on a conventional mortgage.
Cost: Usually 0.5-1.5% of the loan amount annually, divided into monthly payments
Duration: Required until you reach 20% equity (80% loan-to-value ratio)
Removal: You can request PMI removal once you hit 20% equity, or it automatically drops at 22%
Alternatives: Some lenders offer "lender-paid PMI" with a slightly higher interest rate instead
First-Time Homebuyer Tips
1. Check Your Credit Early
Review your credit report 6-12 months before house hunting. Dispute any errors and work on improving your score. Even a small increase can save thousands in interest.
2. Get Pre-Approved
Pre-approval shows sellers you're a serious buyer and helps you understand your budget. It's different from pre-qualification and carries more weight in competitive markets.
3. Budget for All Costs
Beyond the down payment, plan for closing costs (2-5% of purchase price), moving expenses, immediate repairs, and an emergency fund for homeownership surprises.
4. Don't Max Out Your Budget
Just because you're approved for a certain amount doesn't mean you should borrow it all. Leave room in your budget for other goals, maintenance, and unexpected expenses.
5. Research First-Time Buyer Programs
Many states and municipalities offer down payment assistance, tax credits, or special loan programs for first-time buyers. Research what's available in your area.