Comparing mortgage terms (i.e. 15, 20, 30 year)

Mortgage Terms Explained

While comparing mortgage options, let’s look at some essential terms:

• Opportunity cost: When you choose one mortgage option over another, you’ll pass up certain benefits associated with the mortgage you did not select. This loss is referred to as opportunity cost. As you compare different mortgage rates and benefits, consider what you’ll forgo with each option to make a well-rounded decision.
• Principal and interest: Most of your monthly mortgage payments will go toward the principal and interest. Principal is the amount you borrowed from your mortgage lender. It usually includes your home’s cost minus your down payment. The interest is a percentage of the principal you’re required to pay your lender to reward them for lending you money.
• Amount financed: The amount financed refers to the amount of money you borrow after making a down payment. It does not include fees or interest. For example, if you put $20,000 down on a $250,000 home, the amount financed is $230,000.
• Monthly PMI: Private mortgage insurance (PMI) is a type of insurance separate from homeowners insurance that you may be required to pay with your monthly mortgage. Lenders often require PMI for homebuyers taking out a conventional loan and making a down payment of less than 20% of the home price.
• FHA loan: A Federal Housing Administration (FHA) loan is insured by the government. The government does not directly make an FHA payment to the borrower but works with lenders to offer an FHA loan. FHA loans typically have a lower down payment than other loans and are a popular choice for first-time homebuyers or lower-income families.
• VA loan: A VA loan is backed by the Department of Veterans Affairs. This type of loan is available to qualified veterans to help them purchase a home. There are different types of VA loans, but they generally offer benefits like zero-dollar down payments and do not require monthly mortgage insurance.
• VA funding fee: A VA funding fee may be required with a VA loan. It’s a one-time payment made at closing. VA funding fees are calculated as a percentage of the loan amount. This percentage varies depending on factors like how much you put down on your home.

How Mortgage Interest Works

Interest rates vary between mortgages, so it’s essential to consider these rates before selecting a loan. Generally, you’ll pay less interest with a shorter-term loan but have higher monthly payments. Shorter-term loans are usually repaid in 10, 15 or 20 years.

A longer-term mortgage requires repayment over a greater period, commonly 30 years. Since your mortgage payments will be spread out over more time, your monthly payments will be less. However, you’ll accrue more interest with a longer-term loan, and it may come with a higher interest rate.

Other factors influencing interest rates include your credit score, income, loan size and the economy.

Speak With a Loan Officer

There are many factors to consider when selecting a mortgage. Experts are available to help you make sense of the process, conduct a mortgage cost comparison and find a loan suiting your needs.

At Assurance Financial, our licensed loan officers are happy to guide you through the entire loan selection and application process. Find your loan officer today to take the next step toward your home sweet home.