Mortgage 101

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The idea of the American dream - that everyone has the opportunity to succeed - generally includes one key purchase: your very own home. However, to make this dream a reality, most people need to get a mortgage.

A mortgage is much like any other loan: You borrow money from a financial institution, such as BancorpSouth, to purchase your house and then pay it back over time. A mortgage is the largest loan that most consumers will take on during their lifetimes. Because of this, it's important for home buyers to understand exactly what goes into a mortgage and what is required of the prospective homeowner.

What's in a Payment

Once you take out a mortgage, you make payments each month to pay it back. Most homeowners have 15-year or 30-year mortgages, but the duration of your loan will vary depending upon what type of loan you have.

Your monthly mortgage payment goes to cover special expenses - not just the cost of your house. The first expense is the principal balance. This is the amount you borrowed to purchase your home. Another portion of your monthly mortgage payment goes towards the interest on your loan. For instance, interest is the cost of borrowing money - and it's how lenders make money. If you take out a 30-year fixed-rate loan of $240,000 with an interest rate of 3.25 percent, you'll pay $136,018.26 in interest over the life of the loan. Your monthly mortgage payment may also include your annual property taxes and homeowners insurance premiums, costs that can vary depending on the part of the country in which you live and the size of your home.

Want an easy way to figure out what your mortgage payment might be? Check out our mortgage calculator or contact a BancorpSouth mortgage lender for additional information.

Types of mortgages

Depending on your needs, you can choose from several different types of mortgages - and each comes with its own pros and cons. 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 is the length of time it takes to pay off your loan completely. With a 30-year fixed-rate mortgage, you generally have a lower monthly mortgage payment than with a 15-year fixed-rate mortgage because payments are spread out over a longer time period. However, 15-year fixed-rate mortgages typically come with lower interest rates and homeowners pay less interest over the life of a loan.

Homeowners can also choose an adjustable-rate mortgage. 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, then the rate will adjust based on a host of economic conditions. The benefit of an adjustable-rate loan is that the initial interest rate is usually lower than a rate attached to traditional fixed-rate loans. However, because the rate can go up or down after the fixed period ends, the risk is that the payment may increase.

Escrow accounts

When you buy a home, you'll have to pay property taxes each year. And 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.

Consider property taxes: If your property taxes are $6,000 a year, you can either pay this figure in a lump sum when the bill becomes due, or you can add a $500 a month into your monthly mortgage payment. Your lender will then put this money into an interest-bearing escrow account and dip into it to pay your property tax bill when it is due.

Need help with other mortgage-related terms? Use the BancorpSouth mortgage glossary to understand terms, such as LTV, discount points and origination fees.