The majority of people don’t have the capital to buy a house. Therefore, instead, the use of a mortgage is the perfect measure to own a house. The definition of a mortgage is simply a loan to buy a home after making a down payment of an amount from 3 percent to 30 percent.
A bank guarantees a mortgage so that households pay off the loan over a specified period or term, which stands between 7 and 30 years. However, the most popular term is 30 years. Each payment includes a combination of principal and interest, as well as property taxes and if needed, mortgage insurance. In some situations, homeowners insurance may be included, or the homeowner may pay the insurer and maintenance directly.
The principal is the original amount of money you borrowed, which is the price of the house, while interest is what you’re being charged to borrow the money.
Residential mortgages are considered to be the type of loan that is important for households, financial institutions, and macroeconomic stability. Generally, the household in the most developed countries has one dominant asset, a house, and one dominant liability, which is a mortgage. Mortgages are a major fraction of bank assets, despite financial innovations that allow banks to securitize mortgage pools.
How To Compare Mortgage Rates
Before finding mortgage rates, the first step is to decide what type of mortgage best suits your goals and budget. Most borrowers choose 30-year mortgages, but that’s not the only choice. There are typically 7-year and 15-year mortgages, which have lower rates but larger monthly payments than the most popular 30-year mortgage.
A mortgage with interest at or below 3 percent is an excellent mortgage rate. And the lower your mortgage rate, the more money you can save over the life of the loan.
The table below shows the example of a mortgage with a fixed interest rate and the Annual Percentage RateARP on a mortgage of 7 years, 15 years, and 30 years in 2022, in the United States.
Interest Rate is considered to be the cost a customer pays to a lender for borrowing funds over a period expressed as a percentage rate of the loan amount.
Annual Percentage Rate APR is the cost to borrow money expressed as a yearly percentage. For mortgage loans, excluding home equity lines of credit, it includes the interest rate plus other charges or fees. For home equity lines, the APR is just the interest rate.
| Mortgage | Interest rate % | ARP |
| 7 years | 4.12 | 3.9 |
| 15 years | 4.37 | 4.53 |
| 30 years | 4.5 | 4.61 |
Table by Dominic Ukelo
Fixed-rate mortgages
A fixed-rate mortgage has an interest rate that doesn’t change throughout the life of the loan. In that way, borrowers are not exposed to interest rate fluctuations. For example, if you have a fixed-rate mortgage with a 4 percent interest rate and prevailing rates shoot up to 5 percent the next year or decade, your interest rate will remain the same at 4 percent, so you don’t have to worry about paying more. Of course, if rates fall, you’ll be stuck with your higher rate. There are many types of fixed-rate mortgages, such as 7 years, 15 years, and 30 years
Adjustable-Rate Mortgages ARM
Adjustable-rate mortgages ARMs have an initial fixed-rate period during which the interest rate doesn’t change, followed by a longer period during which the rate change at present intervals. Unlike a fixed-rate mortgage, the adjustable-rate mortgages ARMs are affected by market fluctuations. So if interest rates drop, your mortgage payments will drop.
However, the reverse is true — your monthly payments will also rise when rates increase. Generally, interest rates are lower to start than with fixed-rate mortgages, but since they’re not locked into a set rate, you won’t be able to predict future monthly payments.
The adjustable-rate mortgages ARMs come with an interest rate cap above which your loan cannot rise. Adjustable-rate mortgages usually have lower rates to begin with, but the disadvantage is that you’re not locked into that rate, so it can change over the life of your loan.
Also, in most developed countries, such as the United States, there are different types of mortgages, and it’s important to understand your options so you can select the loan that’s best for you. Most types of mortgages are conventional, government-insured, and jumbo loans, also known as non-conforming mortgages.
Conventional mortgages
These are loans that often ultimately are bought by Fannie Mae or Freddie Mac in the United States, the big government-sponsored enterprises that play an important role in the lending market.
Government-insured
Government-insured mortgages are sometimes referred to as government-backed mortgages is the mortgage that backed by the government. The government doesn’t issue the mortgage or lend the money directly to borrowers. The loan is originated by mortgage financial institutions.
The advantages of a government mortgage is that it is easier to be qualify for, requires a lower down payment, and it has lenient credit requirements.
Jumbo loan Mortgage
A mortgage is considered jumbo if the amount of the mortgage exceeds loan-servicing limits set by Fannie Mae and Freddie Mac, which is 647,200 USD for a single-family home in all the United States, except Hawaii and Alaska and a few federally designated high-cost markets, where the limit is 970,800 USD.
Advantages Of Mortgage
- You can purchase a home without a huge amount of cash. As many people don’t have the cash reserves to purchase a home
- Even if you have cash in reserve, by taking a mortgage, you can keep your cash reserves. It may serve your financial situation better to have cash on hand
- The interest is tax-deductible. When you have a mortgage, you’re paying interest on it
- You continue to live in your home and retain the title to it, while paying the mortgage instead of rent payment
- In case of a reverse mortgage, the funds from your reverse mortgage loan can be used to pay off the existing mortgage on your home. While there will still be a lien on your home for the outstanding amount of the reverse mortgage, you are not required to make monthly principal and interest payments on the reverse mortgage, so you will be freed from the monthly mortgage payment expenses. A reverse mortgage is a loan option that can help make it easier for homeowners and homebuyers at age 62 and older to live a more comfortable retirement.
- If your home increases in value in the future, you may be able to refinance your reverse mortgage to access even more loan proceeds.
The Disadvantages of a Mortgage
- One of the mortgage’s disadvantages is that it is considered to be a debt. By taking a mortgage, you’re entering into a long commitment to pay back a lot of money, including interest.
- Secured Loan, a mortgage is a secured loan against your property, so if you default on your mortgage repayments, you could end up losing your home.
- The loan balance increases over time as interest on the loan and fees accumulate.
- As home equity is used, fewer assets are available to leave to your inheritor. You can still leave the home to your inheritor, but they will have to repay the loan balance. Usually, the loan is paid off by selling the home. But, this can also be done using other funds or by refinancing through a traditional mortgage.
- Fees with a reverse mortgage may be higher than with a traditional mortgage.
- When entering into a mortgage, eligibility for needs-based government programs, such as Medicaid or Supplemental Security Income SSI, may be affected.
- A reverse mortgage loan becomes due and must be repaid when a “maturity event” occurs, such as the last surviving borrower (or non-borrowing spouse meeting certain conditions) passes away, the home is no longer the borrower’s principal residence, or the borrower vacates the property for more than 12 months for a medical reason or 6 months for a non-medical reason. The loan will also become due if the homeowner fails to meet other loan obligations, which include paying their property taxes, insurance, homeowners association fees, and maintaining the property.