Property and Mortgages Explained in Plain English

A mortgage is a loan used to buy property, secured on the property itself. If the loan is not repaid, the lender can take the home. That is the deal; everything else is terms.

What your payment is actually made of

A monthly payment usually covers four things, often shortened to PITI:

• Principal - the loan itself, the part that actually reduces what you owe.
• Interest - what the lender charges you for the loan.
• Taxes - property taxes, collected monthly and paid on your behalf.
• Insurance - homeowners insurance, and mortgage insurance if your deposit was small.

In the early years most of the payment is interest. That flips slowly over time.

Why half a percent matters

Example. On a $300,000 loan over 30 years, the payment at 6.25 percent is about $1,847 a month. At 6.75 percent it is about $1,946. That is close to $100 a month, and roughly $35,000 over the life of the loan, for half a percent.

Fixed and adjustable

A fixed rate never changes for the life of the loan, so the payment is predictable. An adjustable rate starts lower but can move later, which means the payment can move too. Ask when it can change, by how much, and what the maximum is.

30 years or 15

A 30-year loan has a smaller monthly payment and a much larger total interest bill. A 15-year loan costs more each month and far less overall. Neither is right for everyone.

A word on the rates you see

The figures at the top of this page, and in the news, are national averages. What you are offered depends on your credit, your deposit, the property and the lender. Compare written offers, not advertised rates.

What this means for you

• Get quotes from more than one lender. The spread is often larger than people expect.
• Compare the annual percentage rate, not just the headline rate, because it includes fees.
• Free, government-approved housing counselling is available through HUD.

Where to check this yourself

Every source below is free, independent and is not selling you anything. If a source is selling you something, treat it as an advertisement, not as education.

• Consumer Financial Protection Bureau - U.S. government agency. Plain-English answers on mortgages, credit cards, loans and debt collection.
• Investor.gov (U.S. Securities and Exchange Commission) - investing basics, a free compound interest calculator, and a background check on anyone offering to manage your money.
• FINRA - oversees U.S. brokers. Clear explainers on bonds and annuities, plus BrokerCheck.
• MyMoney.gov - the U.S. government starting point for financial education.
• Federal Reserve Economic Data (FRED) - the source of the rates at the top of our Money Matters page.
• HUD-approved housing counselling - free, government-approved help for buyers and homeowners.
• Illinois Attorney General - consumer protection and scam alerts for Illinois residents.
• Illinois State Bar Association - free public guides on wills, probate and estates in Illinois.
• Illinois Department of Insurance - questions and complaints about annuities and insurance sold in Illinois.
• Internal Revenue Service - the rules on retirement accounts and what is taxable.