How Does a Mortgage Work?
In plain English, a mortgage is a loan to buy a home
Principal vs. Interest
Early on in your mortgage, a larger percentage of each payment will go towards interest charges and a smaller percentage goes towards the principal repayment. As the total cost of your mortgage goes down, a greater amount shifts towards paying down the principal.
Building Equity (Home Ownership)
As your principal declines, you own a larger piece of your home. The common term used here is equity. If your home is worth $250,000 and your mortgage is for $200,000, that means you have $50,000 in equity.
What is Amortization?
Simply put, Amortization is the total period in years it will take to pay off the loan . The Term simply means the length of your mortgage agreement with the lender. The total length of a mortgage makes up several terms. For example, 30 YR, 25 YR, 20 YR, 15 YR or 10 YR.
- Less years to pay off your mortgage
- Less interest paid overall
- Higher mortgage payments
- More years to pay off your mortgage
- More interest paid overall
- Lower mortgage payments
Here is an Amortization Table as a sample scenario to get you started
Amortization Period Monthly Payment you’ll expect to Pay Total Interest Over The Amortization Period Paid
30 $1229.85 $192,745.90
25 $1,354.35 $156,303.58
20 $1,548.09 $121,540.68
15 $1,880.70 $88,525.28
What Does ‘Term’ Mean?
This means the time you have to pay back the mortgage to the lender. It will be defined by the lender as the number of months or years. Most standard mortgages are for 30 years (the mortgage term is 30 years) but you can choose a shorter term. For example a 25 YR, 20 YR, 15 YR or even 10 YR.
What Should I know About Fixed Versus Adjustable Interest Rates?
Fixed Rate Mortgage
Your interest rate and mortgage payments remain the same throughout the term. This means you will know exactly how much your payment will be throughout the life of the loan.
Adjustable Rate Mortgage (ARM)
Simply put your interest rate can change. Typically these loans are fixed for a period of time and then can adjust based on current rates at the time of adjustment. This means that if interest rates fall, more of your mortgage payment is applied to the principal. If interest rates increase, more of your payment will go towards interest. Keep in mind that fluctuating interest rates may affect the total amount of interest you end paying to pay off your loan.
Is There a Pre-Payment Penalty if You Pay It Off Sooner?
You can repay all or part of your mortgage at any time without a prepayment charge. This means you can pay off your mortgage faster, without penalty. For example you can do bi-weekly payments or add more towards your principal at any time.
The Moreira Team does not believe in pre-payment penalties so all the loans we offer do not have a prepayment penalty.
You have a number of fixed payments for a certain period of time before you can start making extra payments on your loan. If you attempt to make a lump sum payment or payoff your loan by refinancing or selling you could get hit with a pre-payment penalty.
Why would a lender penalize you for paying your mortgage off sooner?
There are lenders that still do this, The Moreira Team doesn’t penalize our borrowers for paying off their loan off early.
How do I Set a Payment Schedule?
Another important decision is setting your mortgage payment frequency. Traditionally, mortgage payments are made every month. But there can be significant benefits to paying more frequently, especially if you choose an accelerated or bi-weekly option. With more frequent and accelerated payments, you pay a little more each month, but you’ll benefit by paying down your mortgage faster and saving interest costs over the long term.