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Mortgage Basics

Understanding the fundamental concepts of your home loan.

Interest Rate vs. APR

When shopping for a mortgage, you'll see two percentages. It's crucial to know the difference:

  • Interest Rate: This is the cost of borrowing the principal loan amount. It determines your monthly principal and interest payment.
  • APR (Annual Percentage Rate): This is a broader measure of the cost of your loan. It includes the interest rate plus other costs such as broker fees, discount points, and some closing costs, expressed as a yearly percentage.
Tip: Use the APR to compare loans from different lenders. A lower interest rate might come with high fees, resulting in a higher APR.

Fixed vs. Adjustable Rate Mortgages (ARM)

Fixed-Rate Mortgage

The traditional choice. Your interest rate stays the same for the entire life of the loan (usually 15 or 30 years). This offers stability and predictable monthly payments.

Adjustable-Rate Mortgage (ARM)

The rate is fixed for an initial period (e.g., 5, 7, or 10 years), then it adjusts annually based on market conditions. ARMs often start with a lower rate than fixed loans.

Best for: Buyers who plan to sell or refinance before the fixed period ends.

Amortization Explained

Amortization is the process of paying off a debt over time through regular payments. A portion of each payment goes toward interest, and the rest goes toward the principal balance.

How it works:

  • Early Years: Most of your payment goes toward interest. You build equity slowly.
  • Later Years: Most of your payment goes toward principal. You build equity faster.