What's the Best Way to Structure a Mortgage?

A mortgage is a great tool when buying a house. It allows you to become a homeowner without having to make large down payments. But before taking on a mortgage, it is important to understand its structure. Doing so will help you get the best deal when looking for a mortgage.

Structure of a Mortgage

Two main factors affect monthly mortgage payments. They are the size and term of the loan. Size refers to the amount of money you borrow, and the term is the amount of time given to pay it back. The longer your term, the lower the monthly installments you have to make.

The mortgage payment also has four components that play into it. They are the principal, interest, taxes, and insurance (PITI).

 

• Principal

It is the portion of each mortgage payment that goes to the repayment of the money you borrow. The structure of most loans is that the first years focus more on the interest and vice versa.

 

• Interest

It is the reward the lender gets for taking a risk when giving you the loan. Higher or lower interest rates impact mortgage payments to be higher or lower. They will automatically also determine the amount of money you can borrow.

 

• Taxes

There are real estate and property taxes. Government agencies set these taxes and calculate them on an annual basis. However, you can pay them as part of your monthly installments. The lender will collect and hold them on your behalf for payment when they are due.

 

• Insurance

There are two types of insurance coverage for inclusion on a mortgage payment. These are property insurance and private mortgage insurance (PMI). The lender can also collect these payments and hold them until it is due.

Taxes and insurance remain the same independent of your mortgage type. So when structuring, the focus is on the principal and the interest. Another thing you may need to consider is amortization. It is the spreading out of the principal and interest with regular payments over the loan term.

Structuring Options

There are more personal factors to consider when structuring, like your cash flow and homeownership length. Thus, you owe it to yourself to consider all options for structuring. Consider carefully to avoid problems after you start your payments.

 

• 30-Year-Fixed Mortgages

These mortgages are the most common structure that most people pick. It is because its monthly payments are low. You also get to know exactly what your interest and principal payments will be every month. They do not have any interest rate risk.

 

• 15-Year-Fixed Mortgages

This option compresses your payments in half the time. They have slightly lower interest rates but higher monthly payments. When choosing this structure, you need to weigh your options. You may need to forego your savings so you can put in more money toward the mortgage.

 

• Adjustable-Rate Mortgages

The third option is 7-1 adjustable-rate mortgages (ARMs). Their interest adjusts after an initial fixed-rate period. They are initially lower than the 30-year-fixed option but undergo amortization over the 30 years. Interest rates may go up or down depending on the environment.

There is a risk if you hold your mortgage past the fixed-rate period. It is because interest rates could go higher, causing higher payments. They are not the best fit for the long term. If you think you need at most an extra three months, then you can get the 10-1 ARM.

For more information on structuring mortgages, visit Phyllis Cyphers & Associates at our office in Indian Wells, California. You can also call (714) 323-1175 to book an appointment today.