A mortgage is a home loan that you borrow from a financial institution such as a bank, credit union, or lending agency. Instead of paying a house in full, you seek their assistance to facilitate the purchase of a home. They will be covering the costs of purchasing the home provided that you pay them back on a monthly basis over a predetermined number of years. The total loan amount consists of the principal that goes towards the payment of the house itself and the interest rate which is the cost of processing by the bank in order to get a loan approved.
The different types of mortgage
- 30-year fixed-rate home loan
In this type of loan, homeowners are deemed to make monthly payments for a period of 30 years. Typically, 30-year fixed-rate mortgage has an interest rate that starts at 5%. This means that for every monthly payment, 5% of it will go towards the interest and 95% goes towards the principal. Bear in mind that 5% interest rate is not assessed for all homeowners. Depending on a homeowner’s financial status, employment status, and credit score, the interest rate may be set at a higher percentage.
Typically, during the first few years of a 30-year mortgage loan, a huge chunk of cash will go towards paying off the 5% loan. But as years pass, the payments that go toward principal as payment allocated to interest goes down at the same time. Once you have made timely payments for 360 months, the house will finally be under your name.
- 15-year fixed-rate home loan
There are Arizona home loans that feature a 15-year term instead. The payment of this type of home loan is identical to that of the traditional 30-year fixed-rate loan. The only difference is that in a 15-year loan, a homeowner will have to pay higher monthly payments as the total loan amount is spread across 180 months only.