The Three Elements of a Mortgage
Mortgages have three elements: a loan type, a rate type and a term. Knowing how these pieces work together can help you pick the best mortgage for you.
A mortgage’s type depends on if a government agency or private investors are involved, as well as the size of the loan.
FHA loans are the easiest to qualify for. They require a low down payment and credit score, but they can cost more over time because they require you to pay a fee called mortgage insurance. You can get an FHA loan from any FHA-approved lender. These loans are insured by the Federal Housing Administration (FHA), which just means that the FHA protects lenders against loss from homeowners who default on their loans. Learn more about FHA loans.
Conventional loans are a bit harder to qualify for, but they can cost less over time than an FHA loan. With a conventional loan, you can avoid paying private mortgage insurance if your down payment is 20% or more, which can save you hundreds of dollars on your monthly mortgage payment. Learn more about conventional loans.
VA loans are exclusively for veterans, eligible surviving spouses and active-duty service members. VA loans offer the opportunity to buy a home with no down payment or private mortgage insurance. Learn more about VA loans.
Jumbo loans are mortgages that exceed the conventional loan limit. This simply means that you’ll need a jumbo mortgage if your loan amount is between $453,100 and $3 million. Learn more about Jumbo loans.
There are two kinds of mortgage rates – fixed rates and adjustable rates – and you can pick the type of rate that matches your goals. You can see our current interest rates here.
Fixed rates stay the same for the life of your loan. A fixed-rate mortgage will keep your month-to-month mortgage payment consistent. This is a great option for homeowners who want a consistent payment to budget around and to lock in a low rate for the length of the loan.
Adjustable rates stay the same for the first 5, 7 or 10 years of the loan. Then, your rates adjusts up or down once per year depending on market conditions. An adjustable-rate mortgage offers the opportunity to get the lowest rate possible and is a good choice for homeowners who plan on moving or refinancing after the initial fixed-rate period ends.
The term is the length of the loan. Most fixed-rate mortgages have 30- or 15-year terms, although you can choose any term from 8 to 30 years with a Divito Lending YOURgage. Adjustable rate mortgages typically have a 30-year term.
Benefits of a Longer Term
A longer term can help keep your monthly payments lower, freeing up cash for home improvement projects or building your savings.
Benefits of a Shorter Term
A shorter term means you’ll pay off your mortgage sooner, pay less in interest and can build equity in your home faster.
The Parts of a Monthly Mortgage Payment
Monthly payments are usually composed of three portions: the principal, the interest, and the taxes and insurance (typically grouped together).
- The principal goes toward paying down the balance of the loan. Any money paid toward your principal increases the amount of equity you have in the property.
- The interest goes to your lender as a fee for borrowing money.
- The taxes and insurance covers your property taxes and homeowners insurance premiums. This portion is only included in your payment if you have an escrow account, which is a special account that your lender uses to hold the money that’s used to pay your property taxes and insurance premiums. With an escrow account, you never have to worry about paying your tax or insurance bills since your lender takes care of that for you.