Step 11 of 48 Phase 2: Assess Your Buying Power
2.4 Mortgages 101
Understanding mortgages is essential for your homebuying journey. A mortgage is a loan that allows you to purchase a home by spreading the cost over many years.
What This Step Covers
- What Is A Mortgage
- How Payments Work
- Interest Rates
- Terms (15/30 Year)
- Fixed Vs Variable
- Amortization
Understanding PITI
| Component | Description |
|---|---|
| P | Principal - Loan amount repayment |
| I | Interest - Cost of borrowing |
| T | Taxes - Property taxes (often held in escrow) |
| I | Homeowners Insurance (often escrowed) |
Common Mistakes to Avoid
- Confusing the interest rate with the APR - the APR includes fees and is the true cost of borrowing
- Not understanding how adjustable-rate mortgages (ARMs) reset and how much payments can increase
- Ignoring the amortization schedule - most of your early payments go to interest, not principal
- Assuming a 30-year mortgage is always better than a 15-year without comparing total interest paid