Financial Resource Center: Visit our financial resource center for information to help support you through the unexpected

Mortgage

Advertising Disclosure

Any opinions, analyses, reviews or recommendations expressed in editorial content are of the author alone and have not been reviewed, approved or otherwise endorsed by the advertiser. We make every effort to provide up-to-date information, however we do not guarantee the accuracy of the information presented. Consumers should verify terms and conditions with the institution providing the products. Articles may contain some sponsored content, content about affiliated entities or content about clients in the network. The loan offers that appear on this site are from companies from which LowerMyBills receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). LowerMyBills does not include all lenders or offers available in the marketplace.

Editorial Note

LowerMyBills is compensated by third-party advertisers, however, any opinions, analyses, reviews or recommendations expressed in editorial content are of the author alone and have not been reviewed, approved, or otherwise endorsed by the advertiser. While reasonable efforts are made to maintain accurate information, the information is presented without warranty.

Understanding Mortgages

from home refinance to home purchase, lmb has you covered
Best Refinance Mortgage Lenders
Best Home Loans in 2020
Best Reverse Mortgage Lenders
Mortgage Rates
Other Mortgage Categories

If you’re looking to become a homebuyer, chances are you’ll have to take out a mortgage. Statistics show that approximately 63% of US homeowners have some of their mortgage left to repay.

Therefore, your mortgage is a hugely important consideration. Getting a good deal on the right type of mortgage will be highly beneficial for your financial future.

However, this is easier said than done. Mortgages are complicated financial instruments, so you’re likely to need the answers to a lot of different questions before you decide to commit to one.

Read on for our list of mortgage FAQs and our critical tips on how to make the most of your mortgage.

 

Pros and Cons of the Different Loan Types

15 Year Fixed Rate

Pros
  • Lower interest rate
  • Lower amount to pay back
  • Home paid off in only 15 years
Cons
  • Higher monthly payment

30 Year Fixed Rate

Pros
  • Lower monthly payment
Cons
  • Higher interest rate
  • In debt for 15 more years
  • Higher amount to pay back

5 Year Adjustable Rate

Pros
  • Lower monthly payment for the first five years
  • Perfect if your living situation isn’t permanent
Cons
  • Monthly payments after first 5 years will be unpredictable (no fixed interest rate)

Frequently Asked Questions

Learn the mortgage basics

How do mortgages work?

A mortgage is a loan you take out from the bank for which a piece of the property serves as collateral. This piece of property will most often be your primary place of residence. 

That said, you can also take out a mortgage against a second property. This might be an investment property or a holiday home. In this case, this property will serve as security for the loan.

As the amount of money you borrow under a mortgage is large, repayment periods are usually much longer than those of normal loans. Terms of 15 or 30 years are common under standard mortgages.

Once you borrow the initial sum of money, you pay it back in regular installments throughout this period. Mortgage repayments usually occur every month.

On top of the amount you borrowed, you will also pay a certain percentage as interest each month. This is how the lending institution profits from the arrangement.

What are different types of mortgage?

Not every mortgage is the same. When you apply for a mortgage, your provider may present you with several different options. We’ve looked at a few of the most important ones here.

Repayment Mortgage

This is the standard mortgage arrangement that most people will be familiar with. You borrow a certain sum and pay this back with interest in regular installments over a given period.

Interest-Only Mortgage

Under this payment structure, borrowers pay back only the interest they owe on their mortgage in repayments. They do not owe the principal amount (the amount they borrowed) until the end of the loan period.

This results in repayments being much lower. However, it is risky as it usually relies on investment of the principal money, which may not appreciate as required.

Fixed-Rate Mortgage

A fixed-rate mortgage has an interest rate that does not change from one repayment to the next. If you sign up for a fixed-rate mortgage with interest at 4%, you will pay 4% of the amount outstanding as interest on all of your repayments for a given period.

After this period elapses, your lender switches your interest rate to a standard variable rate or to another fixed rate. 

Standard Variable Rate Mortgage

A standard variable rate (SVR) mortgage allows a lender to set their own interest rate and change it as they please. Once the initial period of a fixed-rate mortgage is over, many borrowers find themselves operating within this payment structure. 

The favorability of this situation for the borrower varies widely.

Tracker Mortgage

A tracker mortgage has a variable interest rate that tracks a certain benchmark, usually determined by the Bank of England. This benchmark will usually be a publicly-known composite rate, such as LIBOR or EURIBOR.

What are mortgage rates today?

Every mortgage lender has different rates of interest. Different mortgages from the same lender will also differ in terms of prices; the shorter a mortgage’s term is, the lower its rate of interest will typically be.

While there are variances, however, mortgage rates between lenders generally don’t change significantly. This is because it would make competition impossible for providers with higher rates.

Mortgage rates are closely tied to interest rates in the economy. The Federal Reserve, which is America’s central bank, decides on these, based on economic conditions. When the American economy is struggling, the Fed will lower interest rates to encourage borrowing and increase spending. 

As this data from Freddie Mac shows, mortgage rates have reached historic lows of late. This is due to COVID-19.

Will mortgage rates go down?

As we outlined above, mortgage rates are closely tied to market performance. If the American economy starts to struggle, interest rates may fall again.

Keep in mind, however, that mortgage rates are currently at record lows. While further drops are possible, it is more likely that they will increase than decrease in the long run.

How large of a mortgage can I afford?

The answer to this question depends, first and foremost, on your income. Someone with average annual earnings of $100,000 will be able to afford roughly twice as large a mortgage as someone with earnings of $50,000.

In general terms, therefore, it is useful to consider mortgage affordability in terms of a percentage of income or overall wealth. A good rule is that your mortgage repayments should not exceed 25% of your monthly income.

Is mortgage interest deductible?

You may be interested to know about the tax implications of your mortgage, and whether interest repayments might serve to lessen your financial burden at tax time. The good news is that a tax deduction in respect of mortgage interest does indeed exist.

However, the benefits of the deduction are not as straightforward as you might think. The majority of those with mortgages in America receive no benefit whatsoever from this tax break.

This is because homeowners need to itemize their tax deductions to qualify for the relief. For most people, the standard tax deduction is close to or over their collective itemized deductions. If this is the case for you, you will not be able to benefit from the mortgage interest tax deduction.

When should I refinance my mortgage?

Refinancing can be a difficult concept for new mortgagors to get their heads around. What it primarily refers to is paying off an existing mortgage and replacing it with a new one.

There are a few different reasons why you might choose to do this. Generally, it will be done to get more favorable mortgage terms than are possible under a current borrowing instrument.

For instance, you might want to get a mortgage with a lower interest rate than you’re currently on. Alternatively, you might decide that you’d be better off with a variable rate rather than a fixed rate.

An important consideration when you’re deciding whether to refinance your mortgage is money. Unless you’re confident that refinancing will save you money over the long term, you probably shouldn’t bother.

How should I refinance my mortgage?

Mortgage refinancing is something of a specialist area. To make sure you’re getting a good deal that will benefit you in the long run, you should go to a financial provider with a track record of dealing with refinancing products.

There are several finance providers who can provide help in this niche of the market. Have a look at all of them before making your decision.

Should I pay off my mortgage early?

If you manage to save up a lot of money throughout your life, or you come into a large pool of cash through, for example, an inheritance, it may occur to you to pay off your mortgage early. While the idea of being mortgage-free is an inviting one, there are a few things to consider.

Firstly, your mortgage may not be the most expensive debt you have. Unpaid credit card debts or term loans will have much higher interest rates, so you should prioritize borrowings like these ahead of your mortgage.

Another thing you should prioritize ahead of your mortgage is your pension. If you don’t have one, you should start one as soon as possible and put it as much into it as possible.

This is because pensions are very tax-efficient. The more you contribute to your pension, the more money the federal government will give you tax relief.

You should also compare the interest rate on your mortgage to the savings rates currently available on deposit accounts. Does the latter outweigh the former? If it does, your money would be doing more for you by sitting in a savings account than paying off your mortgage. As well as this, some savings schemes offer tax-free returns.

If you have a family to support, you should also consider the adequacy of your life insurance coverage.

However, paying off or overpaying your mortgage is still a good idea if you can afford it. Just make sure that all other priorities are taken care of first, and that you have enough money to keep you afloat if some disaster should strike.

Can I get a mortgage if I have poor credit?

Your credit score is a representation of your borrowing history to date. If you’ve paid back every loan you’ve ever taken out in good time and never been late with a credit card payment, you should have a good credit score, and this question probably won’t apply to you.

However, for a significant percentage of Americans, this is unfortunately not the case. A few mishaps with debt early in life can leave you with a poor score, which can make securing loans very difficult.

Some mortgage providers won’t lend to you, while others will only offer loans with prohibitive terms.

However, that doesn’t mean that getting a mortgage will be impossible for you. There are several options to look into if your credit score is causing problems.

Firstly, consider going to a provider who specializes in lending to those with poor credit scores. These will typically be smaller, less established institutions, but they can still provide you with competitive rates and loan structures.

Failing that, you should try to improve your credit score before you apply for your mortgage. There are a couple of things to keep in mind if you’re pursuing this strategy.

Firstly, be vigilant about all your short-term credit repayments. Be sure to stay on top of your credit card bill each month, and try not to use it in the first place unless you have to.

If you have time to wait before you need to take out a mortgage, consider taking out a term loan. If you can pay back this loan within the required timeframe, it might give your credit rating the boost it needs to make your mortgage application successful.

What is a reverse mortgage?

This is something that may apply to you if you are an older homeowner. 

A reverse mortgage is a way for homeowners to release equity in their homes in exchange for regular payments. This is a popular option among retirees, as it can serve to supplement pensions or other retirement income.

If you take out a reverse mortgage, the amount you borrow becomes payable when you permanently move home or die. In the latter scenario, the executor of your estate will have to make the payment on your behalf.

How to Leverage Mortgage FAQs to Make the Most of Your Mortgage

Mortgage FAQs are a great place to start your research if you know little to nothing about mortgages. These are the questions that every newbie to the process has, so you’re likely to be curious about some (if not all) of them as well.

Getting to grips with the information will set you on the path to securing a home loan that will perform for you in the years ahead.

Click here to learn more about getting matched with a mortgage lender today!

Top Mortgage Reads

Quicken Loans: Everything You Need To Know
Quicken Loans: Everything You Need To Know

In 2017, 37% of homeowners in the United States had no mortgage to pay. However, this still leaves 63% of homeowners who still owe money on their house; this might include you.  As you're looking to either purchase a home or refinance, you may have come across Quicken...

How to Buy A House For Sale By Owner
How to Buy A House For Sale By Owner

If you're shopping for a new home, you've probably seen countless listings online and in your local newspaper as you search for the perfect purchase price.  To save money, you may consider buying a home that's listed as for sale by owner (FSBO). These homes aren't...

Mortgage Points: Pros And Cons Of Paying Them
Mortgage Points: Pros And Cons Of Paying Them

You're in the process of buying a home. This is the dream home you've been saving up for, a $300K house in a nice neighborhood.  One of your friends mentions mortgage points and how they reduced his monthly payments in the long-run. You become intrigued and want to...

Refinancing 101: Are Refinance Costs Tax Deductible?
Refinancing 101: Are Refinance Costs Tax Deductible?

Who couldn't use some extra cash?  Refinancing your home is one of several smart ways to save money. You could end up with a lower monthly payment or pay less for your home in the long run. You may even be able to deduct some of your refinance expenses.  At first...

How to Get a Pre Approval Mortgage (Fast!)
How to Get a Pre Approval Mortgage (Fast!)

When you're ready to buy a house, a lot of planning must take place to help you have the best home buying experience! Whether your timeline for a new home is within one year or you need to make a quick move, several things must happen to get the keys to your new...

How Long Does It Take To Refinance a House?
How Long Does It Take To Refinance a House?

Now is a good time to consider refinancing your house.  With mortgage rates hitting all-time lows, there are some real bargains to be had that could save you a significant amount of money.  If you're considering refinancing your home, you may be wondering how long the...

Pin It on Pinterest