How Does a Mortgage Work Anyway?

At USA Lending, we understand that purchasing a home can be overwhelming, especially when understanding how a mortgage works. In this article, we’ll break down the basics of how does a mortgage work and answer some common questions to help demystify the process.

First, let’s start with the basics. A mortgage is a loan that you take out to purchase a property. Real estate acts as collateral for the loan, which means that if you don’t make your mortgage payments, the lender can take possession of the property.

So, what exactly makes up your mortgage payment? Typically, your monthly mortgage payment will include four components:

Principal: This is the money you currently owe on the loan against the property.

Interest: This is the cost of borrowing money, calculated as a percentage of the principal.

Property Taxes: This is a tax assessed by your local government based on the property’s value.

Insurance: This includes homeowner’s insurance, which protects you in the event of damage to your property.

How Does a Mortgage Work?

Now, let’s talk about what happens if you pay extra monthly. Make additional payments towards your principal. You’ll pay off your mortgage faster and save money by paying less interest over the loan duration. For example, you have a 30-year fixed-rate mortgage and make an extra payment of $100 each month. You could pay off your mortgage six years early and save over $30,000 in interest.

15-Year Term -vs- 30 Year Term

Next, let’s discuss the difference between a 15-year term and a 30-year term. A 15-year term will typically have a higher monthly payment than a 30-year term. The reason is because you’re paying off the loan in a reduced time. However, because you’re paying off the loan faster, you’ll save money on interest over the duration of the loan. Additionally, a 15-year term can be a good option if you’re close to retirement or want to pay off your mortgage before your children attend college.

Conversly, a mortgage with a 30-year term will have a lower monthly payment, and you’ll pay more interest over the duration of the loan. A 30-year term can be a good option if you want to keep your monthly payments low. Perhaps you have other financial goals you want to focus on or plan to move before the end of the loan term.

At USA Lending, our experienced loan officers can help you understand your options and choose the mortgage solution that’s right for you. Every client’s financial situation is unique and is committed to guiding you to achieve your homeownership goals.