Average rates on long-term mortgage have started to rise. Rates on a 30 year fixed rate mortgage is creeping back up over 4% to 4.02%, creating an increase for the second week after a 5 week consecutive drop, according to mortgage giant, Freddie Mac. Even with the increase the rates are still lower than the have been since June of 2013. Back in January of this year the rates were 4.53%.
Okay, those rates look good, what other finances get added to a mortgage when you sign the mortgage papers?
Lets start with the basics.
A mortgage is a loan that will finance the purchase of a new home. It will most likely be the largest amount of debt that you will ever take on and the longest lasting debt that you will ever take on. It consists of many different parts including the principal, the interest payments, the taxes and the insurance.
By signing the mortgage papers you are agreeing to repay the loan, the interest and the other costs by using the home itself as the collateral for the loan. If you don't live up to the terms of the loan the lender has the right to take back the home. This is known as a foreclosure.
The principal of the loan, simply put, is the amount of money that you borrowed to purchase the home. A lender will typically ask for a down payment when you are purchasing a home. The amount of the down payment is usually 20% of the home's purchase price. So, if you are looking at a $100,000 home, a payment of $20,000 is a fair down payment.
The interest is what the lender is charging you to borrow money from them. There are other loan costs that a lender may require in addition to the interest, but that's for another blog. When you combine the interest and principal you come up with the bulk of your monthly payment for the home. In the first few years of paying off your mortgage you will mostly be paying off the interest, but as time goes by you will gradually begin to reduce your principal.
The next that is added to your mortgage will be the taxes. The taxes are based on a percentage of the value of your home and will generally go back to your community, for things such as maintaining and building public schools, roads and other public services.
Lastly, a lender will not let you close your mortgage without proof of insurance, just like if you were to buy a car. Home insurance covers things such as fire, theft, floods and other bad weather hazards. The price of home insurance varies, just like the price of car insurance.
Since a mortgage will last anywhere from 15-30 years of your life, it's good to know the basics!