Mortgage 101: A Crash Course for the First Time Home Buyer

What is the principal on a mortgage?

The principal is the amount of money you borrow from the bank to pay off your loan. For example, if you put down 20% on a $200,000 house in cash, your principal would be $160,000.

What will my mortgage payments be? How do I calculate my mortgage payments?

You can calculate your mortgage yourself or plug the numbers into an online mortgage calculator.

The numbers you’ll need for your mortgage calculation are:

1. The principal (total loan amount), “P”

2. The annual interest rate on the loan, “r”

3. The number of years to repay the loan, also known as the loan term, “t”

4. The number of payments per year (12 for monthly payments), “n”

This is what the equation looks like for a fixed-rate loan:

Mortgage = P x (r / n) x (1 + r / n)^n(t)] / (1 + r / n)^n(t) – 1

If you would rather plug in the numbers and let the internet calculate your mortgage payments for you, try NerdWallet’s mortgage calculator tool. It’s free.

How much should I put as a mortgage down payment?

The more you put down at the time of purchase, the less you need to pay off, and the lower your monthly payment will be. The lower the amount you need to pay off, the less interest you will ultimately pay.

That’s why many experts suggest a 20% down payment. However, the average homebuyer in 2024 put down a 13% down payment. That means you can still move forward with buying a house even if you can’t cover 20% down.

You can put less than 20% as long as you get Private Mortgage Insurance (not to be confused with Mortgage Life Insurance). Private Mortgage Insurance ensures that the bank gets paid even if you default on your loan.

The Federal Housing Administration also offers down payments at as low as 3.5% of the mortgage. Just know that you’ll have to pay mortgage insurance with an FHA loan, and you might have to pay other “reasonable and customary” fees. This may include appraisal, home inspection, credit report, and document fees.

3 primary types of mortgage loans

Conventional Mortgage Loan

The majority of home buyers pay a conventional mortgage loan. A conventional mortgage loan is a 20% down payment, and the principal gets paid off monthly for 30 years.

FHA Loan

You’ll want to get an FHA mortgage loan if you have a credit score too low to qualify for a traditional loan or if you can’t put down anywhere near 20%. Beware of extra fees the FHA may charge you. You will have to pay mortgage insurance with this type of loan.

Veterans Affairs (VA) Loan

If you are active duty military or a veteran, then you qualify for a Veterans Affairs (VA) loan. The U.S. Department of Veterans Affairs backs this loan instead of a traditional bank.

What is a reverse mortgage?

A reverse mortgage is a specialized type of loan backed by the FHA where the borrower does not pay a mortgage. This loan is for people 62 and older.

Types of mortgage payments

What is a fixed-rate mortgage?

A fixed-rate mortgage (FRM) means that every month your mortgage payment is the same, or “fixed.” You pay the same amount each month for either 15 or 30 years. An FRM locks in one interest rate, which is beneficial due to the unpredictability of the market. Do your best to get your interest rate as low as possible.

How are adjustable-rate mortgages different than fixed-rate mortgages?

An adjustable-rate mortgage (ARM) is different than a fixed-rate mortgage (FRM) in that your mortgage payment varies from month to month. The payment is dependent on current interest rates. ARMs do not lock in one interest rate, so you take advantage of rates when they hit lows. You also get hit by high interest rates, so proceed with caution here.

How do I get prequalified for a loan, and what does that mean?

Before you seriously start to look for houses, you need to contact your bank to get prequalified for a loan. The bank will tell you how much money you can borrow. This loan is the amount of a mortgage you prequalify for. You might recall hearing other home buyers talk about their “budget” on house hunting shows. The amount of a loan you get prequalified for is your budget, and you’ll need to look for homes at or below that dollar amount.

How much house can I afford?

Your budget is the amount you get prequalified for from the bank. You should look at this number to get a solid understanding of how much house you can reasonably (and comfortably) pay for.

When do I get pre-approved for a mortgage?

You get pre-approved for a mortgage once you find your dream home. You’ll go back to the bank with the number you need, and they will either approve you for the loan or deny you. You want to get pre-approved to demonstrate that, if your offer is accepted, you are fully capable of paying for the home.

What if I have a low credit score and banks won’t lend to me?

Your credit score should be around 740 or higher for banks to give a respectable mortgage loan. If your credit score is too low and banks are turning you away, there are several things you can do.

1. Look into an FHA loan. FHA loans are specifically for people with low credit scores. You can apply for an FHA loan if you make sure to research the caveats listed above. An FHA loan may be a great option for you.

2. Your credit score does not have to be low forever! You can improve it. Try and pay down debt so you aren’t seen as a risk and make all of your credit card payments when they are due. You should never have a balance on your credit card if you can swing it.

Banks see credit card payments as a trial run for your mortgage. The more responsible you are with your credit card, the more responsible you’ll be with your mortgage. (The banks say this. We know how responsible you are already.)

Set up an autopay feature if you just forget to pay off your card, but keep an eye on it. Sometimes, autopay takes one full cycle to take effect after you start it, and you could encounter other unforeseen technical difficulties.

What does it mean if someone co-signs the mortgage loan with me?

If you have difficulty getting a loan, you can have someone co-sign the loan with you. Your co-signer takes full responsibility for the remainder of the loan if you fail to pay. The co-signer is listed on the title of the house.

Do mortgages have interest?

Yes, you will have to pay interest on your mortgage. You’ll want to lock in the lowest rate you can.

What are current home mortgage rates?

There are many helpful websites that can tell you what current home mortgage rates are. Sites like Bankrate and Wells Fargo are great resources that show current home mortgage rates in real-time.

What is an APR?

When you look up current home mortgage rates, you might see “APR” percentages next to interest rate percentages. The APR or “annual percentage rate” is inclusive of the interest rate plus other fees you’ll pay when you set up the loan.

When will mortgage rates go up?

Mortgage rates go up depending on several factors. Mortgage rates have been upwards of 6% since May 2023 and even went as high as 8.01% in October 2023. That means the sooner you can secure a low interest rate, the better.

What does a mortgage broker do?

You don’t have to find the best mortgage situation all by yourself. A mortgage broker works on your behalf to lock in a great interest rate and find the best bank for you to get a mortgage loan from. You may have to pay this person a 1% commission on the loan, but the benefit of working with a broker is that they can find you the best deal and work with your real estate agent to make sure that everything goes smoothly.

How should I shop for a mortgage, and where should I start? Where do I get a mortgage?

You can get a mortgage in several different ways. There is no right or wrong choice; you should opt for the strategy that feels most comfortable to you.

1. Talk with your current bank.

You may be able to get a mortgage loan from your bank. Call and set up an appointment with a mortgage loan consultant. Most banks have features on their website where you can set up an in-person or phone meeting online.

2. Chat with a mortgage broker.

Mortgage brokers will find you the best mortgage loan and work with you and your agent to make sure that the purchase process is smooth. Some brokers take a 1% commission fee, so make sure to meet with a few and know exactly what you’re getting into if you choose to go this route.

3. Look online for mortgages.

You can also get your mortgage loan from one of many online sources. Look into reputable sites like Quicken Loans and Rocket Mortgage.

If you’re stumped, NerdWallet created a handy mortgage quiz that matches you with a lender based on your needs.

The best strategy for finding the perfect mortgage?

All of the above! The more banks you try, the more online sites you research, and the more real estate professionals you talk to, the better your chance of getting a great deal on your home’s mortgage.

Does mortgage interest help with taxes?

Yes! You can get a tax deduction for the interest you pay on your mortgage. There are several criteria you need to meet:

1. Your debt must be secured by a qualified home, which can be your main home or a secondary home.

2. You can only deduct on the first $750,000 of your mortgage ($1,000,000 if your mortgage started before December 16, 2017); $375,000 if married filing separately ($500,000 if your mortgage started before December 16, 2017).

What happens when you pay off your mortgage?

There are four steps to take after you pay off your mortgage.

1. Make sure you get (and file) the canceled promissory note and trust deed from the lender. They should mail this to you.

2. Ask your lender for a copy of the Release of Deed of Trust that they sent to the county.

3. Take your lender off of your homeowners’ insurance.

4. Proof that you paid off your home should show in your credit report. Make sure it’s there.

Still worried about securing a mortgage loan? Work with your real estate agent.

The best thing you can have when you shop for mortgage loans is the support of a top real estate agent. Your real estate agent knows what rates are competitive and can advise you on where to look first.

Excited to get started? Talk to the best real estate agents in your area, because you’ll need their support when you start house hunting.

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