Buying a home will likely be the biggest purchase you’ll ever make and the biggest debt load you’ll ever carry. Unfortunately, almost 75% of buyers admit they never truly understood all the ins and outs of their mortgage before signing on the dotted line. We won’t let that happen to you. We’ve spent months reading all the fine print and breaking it down into easy–to–understand pieces.
What’s a Mortgage?
Most people think of a mortgage as the money you borrow to buy a home, and pay back over time, with interest. But that’s actually not quite right. Technically speaking, a mortgage isn’t a loan. It’s a document that you actually give a bank that says they have the right to use your home as collateral in the event you don’t repay the loan. Once you’ve repaid the loan in full, the mortgage disappears — meaning your bank no longer has any claim to your home.
The term of a loan is the length of time your lender uses to calculate your monthly payments.
Most loans mature (that is, come due) at the end of their terms. An exception is a balloon loan. A 10-year balloon loan might have a term of 30 years (thus giving the buyer lower per month payments), but the loan itself matures at 10 years, which is when you must repay the balance in a lump sum.
This is the amount of money you actually borrow in the form of a mortgage. If your mortgage is for $250,000, then your principal is the same amount: $250,000. This is the amount you’d need to repay to the lender — if the lender didn’t charge interest.
This is the amount you can pay for your home in cash. Ideally you’ll have 20% of the home’s price to put down, otherwise you’ll potentially have to pay mortgage insurance and a higher interest rate. So, if your home costs $250,000, you should aim to have 20% of that amount (or $50,000) saved in cash to use as a down payment.
Annual Percentage Rate
The APR bundles together all the costs associated with your loan — interest, upfront closing costs, and other costs and fees — and expresses the grand total as a yearly percentage. It’s what your loan and its associated fees cost you on an annual basis. Because of this, the APR will always be higher than the interest rate and is a more accurate picture of the overall cost of a loan. But watch out — lenders don’t all calculate their APRs the same way, which means while they help you compare across lending institutions, they aren’t perfect either.
This is the money your lender charges you for the privilege of borrowing all that principal. It’s expressed as a yearly percentage.
Lenders (and others) charge several fees when closing mortgage deals which can add thousands of dollars to your borrowing costs. Depending on the lender and where you live, the fees go by different names and can often be confusing — origination fee, appraisal, and title fee are among the terms you may encounter. Lenders are required by law to give you a “Good Faith Estimate” (GFE) of these costs. Insist that they walk you through every cost on your GFE, line by line.
An origination fee (sometimes called a “mortgage point”) is one of the key amounts a mortgage broker or lender will charge you as a “fee” for processing a loan. One point = 1% of your loan amount. So if your loan amount is $250,000, the origination fee would be equal to $2,500. If they charge two points, the cost would be $5,000. And so on.
Lenders may offer you the chance to pay discount points to lower the interest rate of your mortgage. One point equals 1% of the principal, so on a $250,000 loan, each point costs $2,500. Generally, for each point you purchase you can lower your rate by about 0.25%. Don’t buy any points until your lender walks you carefully through all the math — in general, it doesn’t make financial sense unless you plan to live in the home for at least five years, if not more.
When you apply for a mortgage, lenders will quote a specific interest rate and a certain number of available discount points. However, the market can change while you are looking for your new home, causing rates to go up or down. That’s why it’s a good idea to ask your lender to lock in these rates for a specified period, often 30 to 60 days. Double-check whether there will be a fee to do so, if it is refundable, and get the agreement in writing.
So, a $250,000 mortgage might cost roughly $400,000 over the entire life of the loan to the buyer.