Your principal payment is the part of the amount you borrowed that you pay back each month. The principal balance decreases as you make your payments. Early in the mortgage term, though, you’ll pay more interest and less principal. As you get closer to the middle and end of the term, though, you’ll pay more principal than interest.
Lenders charge interest to lend you the money. It’s how they make a profit and can continue making loans. Each loan has different interest charges or even types of interest rates.
Before you take out a loan, consider whether you want a fixed-rate or adjustable-rate loan.
Fixed rate loan
A fixed-rate mortgage has the same interest rate for the life of the loan. You lock in the interest rate before you close and that’s your rate for the loan’s term.
An ARM rate changes annually after the initial fixed period which may be 1 – 10 years depending on the loan. Adjustable rates are based on an index and predetermined margin, which your lender sets before you close.
The term is how long you have to repay the mortgage. Many first-time homebuyers choose the 30-year term because it has the lowest payment. The tradeoff, however, is a higher interest rate as 30-year terms are riskier for lenders than shorter terms.
If you take out a conventional loan, FHA, or USDA loan, you may pay mortgage insurance. Conventional loan borrowers pay mortgage insurance when they put down less than 20% on a home. But they only pay PMI until they owe less than 80% of the home’s value.
FHA and USDA borrowers pay mortgage insurance for the life of the loan or until they refinance into a conventional loan. Mortgage insurance varies depending on the loan type and your qualifying factors.