By Peyton Zachrich - Home Loans: Key Components and Definitions

1. Interest Rate %

The interest rate, expressed as a %, determines how much interest you owe the lender per year. % interest rate x $ remaining amount owed = $ interest owed per year.

2. Fixed versus Variable Interest Rate

A fixed rate means that you will have the same interest rate % and monthly payments for the entire life of the loan. A variable rate means that your rate can change during the course of the loan, so your payments can go up. Right now interest rates are low, so it's good to "lock them in" with a fixed rate.

3. Points

A "point" is a fee of 1% of the loan amount paid to the lender. Usually, you can "wrap" points into the loan amount instead of paying them out of pocket. If you plan to have a mortgage for a long time, it may make sense to increase the points you pay to "buy down" the interest rate, if the lender gives you the option.

4. Closing Costs

Getting a mortgage means costs for title work, fees to the lender, municipal taxes/fees, appraisals, and inspections. These commonly range from 2-4% of your loan amount, excluding points, and you can usually wrap them into the loan instead of paying for them out of pocket.

5. Down Payment %

A down payment % determines the amount of cash that the buyer must bring to the table. If the price is $100k and the down payment is 5%, then you must bring a minimum of $5k of cash and can finance the rest.

6. Private Mortgage Insurance (PMI)

If your down payment is less than 20%, you will also have PMI expense until you have at least 20% equity in the home. This usually costs ~1% of the original loan amount per year, and it exists to protect the lender from losing money if you default.

7. Amortization Term

The amortization term of your mortgage refers to the period of time over which you pay it off. For residential properties, the most common terms are 15, 20, and 30 years. If you have a shorter term, you will have higher monthly payments, but you will will pay less in interest over the life of the loan because you will pay it down faster.

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