Understanding Mortgages

Most people will need a mortgage to finance the purchase of a home. A mortgage works much like any other loan: You borrow money from a bank, credit union or other lender and then pay it back over time. The main difference? A mortgage is the largest loan that most consumers will take on during their lifetimes.

Because of this, it is important for home buyers to understand exactly what goes into a mortgage and what will be required from the prospective home buyer to obtain one. Those buyers who do their research will dramatically increase their odds of obtaining a Penn Community Bank mortgage or another mortgage option that best fits their needs.

At Penn Community Bank, we offer a variety of home mortgage options designed to help you achieve your financial goals. Let’s dive into the mortgage basics so you can approach your home purchase with confidence and the right financial tools in hand.

Mortgage Basics

Once you take out a mortgage, you’ll make monthly payments to pay it back. The duration of your loan varies depending upon what type of loan you took out. Most homeowners go with 15-year or 30-year mortgages.

When you send your payment to your lender each month, your dollars will go toward paying off several pieces of your mortgage. There is the principal balance, of course. This is the amount of money you borrowed. If you borrowed $200,000 to pay for your home that $200,000 is your principal balance.

You will not only be paying down this balance, though, each time you send in a check. Some of your dollars will go toward paying off your mortgage’s interest. Interest is how lenders make money on your loan. If you take out a 30-year fixed-rate loan of $200,000 with an interest rate of 3.96 percent, you’ll pay $142,080 in interest alone if you pay off the loan at maturity. The reason this figure is so high is that $200,000 is a lot of money, and interest payments add up over time.

Pro Tip: Always factor in the interest when budgeting for a home purchase. The total cost of the loan is often significantly higher than just the principal.

Part of your payment, depending on the arrangement you made with your mortgage lender, might also go toward paying off your annual property taxes and homeowners insurance premiums. Both of these costs vary. In some parts of the country, homeowners might face yearly property taxes of $10,000 or more. In other parts of the country, that figure might be as low as $2,000. The Federal Reserve Bureau says that the average cost of an annual homeowners insurance policy ranges from $300 to $1,000 depending on the part of the country in which you live and the size of your home.

Amortization Schedule: The breakdown of your monthly payment between principal and interest changes over time. Early payments go mostly toward interest, while more of your payment applies to the principal as you progress through the life of the loan.

Types of Mortgages

You can choose from several different types of mortgages. Each comes with its positives and negatives. A Penn Community Bank mortgage offers flexibility in terms of rates and loan durations to suit your needs.

The two most popular loan types are the 30-year fixed-rate mortgage and the 15-year fixed-rate mortgage. As their names suggest, the interest rate attached to these loans never changes, hence the “fixed rate.” The difference between the two loan types is their durations. In a 30-year mortgage, you’ll make loan payments for three decades to pay off your loan completely. In a 15-year mortgage, you’ll pay for just 15 years.

The monthly mortgage payment attached to a 30-year fixed-rate mortgage is lower than it is with a 15-year fixed-rate mortgage because payments are spread out over a longer number of years. However, 15-year fixed-rate mortgages typically come with lower interest rates, which means that homeowners pay less interest during the life of such loans.

Considerations for Choosing a Mortgage Term:

• Long-Term vs. Short-Term: With a 30-year mortgage, you’ll have lower monthly payments but will pay more in interest over time. With a 15-year mortgage, your monthly payments will be higher, but you’ll save thousands in interest over the life of the loan.
• Lifestyle & Future Plans: If you’re planning to stay in your home for many years, a fixed-rate mortgage might be better. However, if you think you might sell or refinance, a shorter-term mortgage could save you money.

Homeowners can also choose an adjustable-rate mortgage. Again as the name suggests, the interest rate on these loans changes during the loan term. Often, the loan will have a fixed rate for a certain number of years, say five or seven. The rate will then adjust based on a host of economic conditions, meaning that the rate can either go up or down.

The benefit of an adjustable-rate loan is that the initial interest rate is usually lower than the ones attached to traditional fixed-rate loans. The risk, though, is that the rate will rise significantly after the fixed period ends. Adjustable-rate mortgages (ARMs) may be suitable for buyers who anticipate moving or refinancing before the adjustable period begins.

Other Types of Mortgages to Consider:

• FHA Loans: Backed by the Federal Housing Administration, these are ideal for first-time homebuyers with lower credit scores and smaller down payments.
• VA Loans: Available to veterans, these loans often come with competitive interest rates and no down payment requirements.
• Jumbo Loans: These are for higher-priced properties that exceed conforming loan limits.

Escrow Accounts

When you buy a home, you’ll have to pay property taxes. If you are taking out a mortgage, you’ll also need to purchase homeowner’s insurance. Homeowners have the choice to either pay these fees on their own or lump them into their monthly mortgage payments and have their lenders pay them on their behalf.

The second option is an escrow account. Consider property taxes: If your property taxes are $6,000 a year, you can either pay this figure in a lump sum or you can add $500 a month into your monthly mortgage payment. Your lender will then put this money into an escrow account—which is an interest-bearing account—and dip into it to pay your property tax bill when it is due. It is a good option for homeowners who do not want to save the large amount of money they’d need each year to cover their property tax bills.

Homeowners Insurance: An escrow account can also cover homeowners insurance, ensuring that your coverage is paid in full and on time every year.

Common Mortgage Mistakes to Avoid

1. Not Shopping Around for Lenders: Rates and terms can vary dramatically between lenders. Even a slight difference in interest rates can save or cost you thousands of dollars over the life of a loan.
2. Not Understanding Loan Terms: It’s crucial to know the details of your mortgage, including penalties for early repayment and whether your interest rate could change (if you have an ARM).
3. Borrowing the Maximum: Just because you qualify for a large loan doesn’t mean you should take it. Be mindful of your long-term financial health, future expenses, and maintaining financial flexibility for unforeseen circumstances.
4. Skipping the Pre-Approval Process: Pre-approval helps you understand what you can afford and shows sellers that you’re a serious buyer. Skipping this step may result in missed opportunities or delays.
5. Overlooking Additional Costs: Many buyers focus only on the principal and interest, forgetting about costs like property taxes, insurance, HOA fees, and closing costs. These can add up significantly and affect your monthly budget.
6. Neglecting Your Credit Score: Your credit score has a direct impact on the mortgage rates you’re offered. Failing to check and improve your score before applying for a loan could cost you in the form of higher interest rates.
7. Making Large Purchases Before Closing: Avoid making big purchases, such as buying a car or new furniture, before closing on your mortgage. These purchases can affect your credit and debt-to-income ratio, potentially jeopardizing your loan approval.

Make Informed Mortgage Decisions

Understanding the intricacies of mortgages can empower you to make more informed decisions, ensuring that the loan you choose fits your financial situation and homeownership goals. Whether you’re a first-time buyer or refinancing, the more knowledge you have, the better equipped you’ll be to navigate the mortgage process and secure the best terms possible.

Ready to take the next step? Contact us today to learn more about how Penn Community Bank can help you get started with your home mortgage journey.