Mortgages
According to the Webster’s dictionary, a mortgage is “the pledging of a property to a creditor as security for the payment of a debt”.  In plain terms, it is a legal contract that says if you don’t pay back the loan (along with all of the fees and interest that are included with it), the lender can have your house.
 
In states following the “lien theory”, (which NJ is), the borrower (you) owns the title to his/her home despite the outstanding mortgage obligation. In addition, the borrower holds the deed while they are making the mortgage payments. They are considered home owners even though the bank has security interest in their property.
 
Your down payment is the lump sum you pay up front that reduces the amount of money you have to finance.  You can put down as much money as you want, or you can sometimes pay as little as 3-5% of the purchase price.  The more money you put down, the less you have to finance and the lower your monthly payment will be.
  

What is a mortgage?

Types of Mortgages

  
There are many types of mortgages that you can choose from.  Which type you choose typically depends on the length of the time you think you’ll be in your home or the other financial obligations you have.  If you think you’ll be there for the long haul, then you may want a fixed rate mortgage with the lowest interest rate you can get.
 
There may be other considerations, however.  What if you have kids who are going to be entering college in 10 years?  In that case, you might consider getting an adjustable rate mortgage or a mortgage with a balloon payment so you can keep your payments low for the first few years in order to save for college.  Once the kids are out of college, you can refinance at the current rate.  If you don’t think you’ll be in your home for that long, they you may also want to look at other options.
  
This mortgage offers an interest rate that will never change over the entire life of the loan.  If you lock in a rate of 4.25% that calculates to a payment of $1,283 per month, then you know that in 20 years you’ll still be paying $1,283 per month.  The only things that change will be the property tax and any insurance payments that are included in your monthly payment.
 
The length (known as the term) of your fixed rate mortgage can be 15, 20 or 30 years.  These terms have an effect on the various benefits you’ll get from your mortgage.
 

30-Year Fixed-Rate: The 30-year term gives you the maximum tax advantages by having the greatest interest deduction.  While the fact that you’re paying more interest may not seem like a benefit, you make lower payments with the longer term fixed-rate loan and you get a bigger tax deduction.  If you will be staying in your home for many years (especially if you think your income may increase tremendously), this may be the best option.  This type of loan is also the easiest to qualify for.

15-Year Fixed-Rate: You can shorten your mortgage by 15 years and usually get a lower interest rate with the 15-year mortgage.  The advantage with the shorter term, besides paying off your loan sooner, is that you’ll also have more equity in your home sooner, but the down side is that you will also have a higher monthly payment.
  
  

Fixed-Rate Mortgages

An adjustable-rate mortgage (ARM) has an interest rate that changes based on the changing market rates and economic trends.  They usually offer an initial rate that is two to three percentage points lower than fixed-rate mortgages, but these rates are not fixed.  If you don’t expect to be in your home for many years, however, an ARM may be a good option.
 
  
How often your interest rate adjusts is determined by the terms of the loan.  You may choose a six-month ARM, a one-year ARM, a two-year ARM, or some other term.  There is usually an initial period of time during which the rate won’t change.  This might be anywhere from six months to several years.  For example, a 5/1 year ARM would mean the initial interest rate would stay the same for the first five years and then would adjust each year beginning with the sixth year.
 
There will also be caps, or limits to how high your interest rate can go over the life of the loan and how much it may change with each adjustment.
 
The interest rates for ARMS can be tied to one-year U.S. Treasury bills, certificates of deposit (CDs), the London Inter-Bank offer Rate (LIBOR), or other indexes.  When mortgage lenders come up with their rates for ARMs, they look at the index and add a margin of two to four percentage points.  Being “tied” to these index rates means that when those rates go up, your interest goes up with it.  The flip side is that if they go down, your rate also goes down.
  

Adjustable-Rate Mortgage
  

A balloon mortgage offers an initial interest rate that is lower than fixed-rate mortgages.  It keeps this low fixed rate for five to seven years and then requires a “balloon” payment.  The balloon payment is the final payment of the loan and pays off the entire balance.
 
 
Monthly payments are low because the payments for those first five to seven years are amortized at a low interest rate over the total length of the loan.  If you plan on selling your home, paying it off, or refinancing it before the balloon payment is due, then this type of mortgage is a good deal.
  

Balloon Mortgage

What is a mortgage payment made up of?

Principal: This is the total amount of money you are borrowing from the lender (after you’ve made your down payment).  It is the amount of money you are financing.
 
Interest: This is the money that the lender charges you for the loan.  It is a percentage of the total amount of money you are borrowing.
 
Taxes: Money to pay your property taxes is often put into an escrow account meaning that the money is placed in the hands of a third party until it is time to pay or certain conditions are met.  A portion of your property tax is added to your monthly mortgage payment and held in escrow until it is due.
 
Insurance: There are several types of insurance that can come into play when you get a mortgage.  You’ll have hazard insurance to protect you against losses from fire, storms, theft, etc. and if your home is in a flood zone and you’re getting a federally insured loan, you’ll have to get flood insurance.  Unless you have at least 20% equity in your home, you’ll also have to pay Private Mortgage Insurance (PMI).  This can sometimes be pretty expensive, so it makes sense to put as much into your down payment as you can.  (Equity is the portion of your home’s value that you have already paid for).
 
 
  
These pieces of a mortgage payment are commonly referred to as PITI.
 
  
Mortgages are typically paid off in incremental payments that gradually chip away at the principal of the loan.  This is called amortization.  The portion of your payment that goes to pay your interest is much higher than the portion that goes to the principal- at least for the first several years.
These payments are precisely calculated and scheduled to pay off the loan in a specified period of time.
  
  
  
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