The Beginner’s Guide to Home Loans

There are countless joys of becoming a homeowner.

For starters, ample space to call your own. Then, the joy of filling that space— developing your style, selecting paint colors, buying and arranging furniture. There’s so much to look forward to and enjoy.

But before you start the glorious work of turning a house into a home, you’ll first need to purchase the house. That’s where we come in—you’ll work with one of our trusted mortgage architects to secure a home loan that fits your financial situation. But how do you know which mortgage loan is right for you? What are your options in terms of length, type, and rates? And terms like principal, interest, and amortization—what do those actually mean?

Let’s break it down.  

What is a mortgage term?

The mortgage term is the time period in which a homeowner agrees to repay the loan. Typically, financial institutions offer 15-year and 30-year mortgages. Determining which loan is better for you will depend on your financial situation.

• 15-year mortgage loan: A 15-year mortgage is appealing to homeowners because of the shorter loan term, which means you’ll pay off the loan faster than the 30-year option. Additionally, 15-year mortgages may have lower interest rates available. However, the shorter term means higher monthly payments, which isn’t always an option for all homebuyers.
• 30-year mortgage loan: A 30-year mortgage is appealing to homeowners because homeowners pay lower monthly payments than the 15-month option. However, due to the longer loan term, homeowners end up paying more interest over the life of the loan than they would by choosing the 15-month term.

What types of mortgage loans are available?

There are two types of mortgage loans available to you—a fixed rate mortgage loan and an adjustable rate mortgage loan.

• Fixed rate mortgage loan: Fixed rate mortgages keep the same interest rate for the entire length (or term) of the mortgage loan. This option is appealing because monthly payments are predictable and consistent. In other words, homeowners know exactly how much they’ll be paying each month for the next 30 or 15 years. (That said, homeowners insurance and taxes can fluctuate which would affect the monthly payment if the member escrows). Buyers might be concerned with higher interest rates up front with a fixed rate mortgage, but when rates are low, you can refinance and lock it in for the life of the loan.

• Adjustable rate mortgage loan:With adjustable rate mortgages (ARM), interest rates can change over time. ARMs tend to provide buyers with lower interest rates and monthly payments up front, but once the initial term period ends, rates may go up or down based on market conditions.

Upon locking in a mortgage, you’ll begin the process of paying off the loan.

Making payments on time is a crucial step for paying down the mortgage loan, building home equity, and ultimately owning more of your home than the lender. Here are some key terms that will help you understand your loan and payments.

• Down payment is the initial upfront payment made when purchasing a home. It represents a portion of the total purchase price and is typically required to secure financing for the remaining balance. If you have less than 20% down payment, you will incur extra monthly payment costs for Private Mortgage Insurance. However, Verve does offer some products where PMI is not required with less than 20% down.
• Principal is the original amount of money borrowed from a lender for the mortgage loan.
• Interest is the monthly amount a lender charges for funding the mortgage loan.
• Amortization schedule refers to the original principal + accrued interest that homeowners pay back over the life of the mortgage loan.
• Mortgage amortization is the process of eliminating debt through consistent payments over time based on a set schedule. Mortgage amortization factors what percentage of a payment goes towards interest vs. principal.
• Escrow is a financial arrangement where a neutral third party (such as Verve) holds funds or assets on behalf of the two parties (such as a buyer and seller, or homeowner and property taxes) involved in the transaction until specific conditions are met. It protects the involved parties and ensures that transactions proceed smoothly, securely, and predictably.

As always, you can reach out to a Verve mortgage architect to discuss which mortgage loan option best fits your financial situation.

Until then, click these links to learn more about Verve’s fixed rate mortgage and adjustable rate mortgage options.