Mortgage Basics: What to Know Before You Borrow
Term, rate type, points, and PMI — the mortgage choices that quietly shape decades of your life.
The big two decisions
Fixed vs adjustable rate, and 15 vs 30-year term. Fixed-rate gives certainty; adjustable starts lower and can rise. 30-year keeps payments low; 15-year builds equity faster and saves enormous interest. Pick based on stability and budget, not rules.
How much house is reasonable
A common rule: total housing costs (mortgage, taxes, insurance, HOA) under 28% of gross income, and total debt under 36%. Lenders may approve more — they're not protecting your long-term financial health, you are.
Down payment trade-offs
20% down avoids private mortgage insurance (PMI). 10% or less is possible with FHA, VA, or conventional loans but costs more. A bigger down payment lowers payment and interest but ties up capital that might earn elsewhere.
Points and rate buydowns
'Points' are upfront fees that lower your rate. One point typically equals 1% of the loan and lowers the rate ~0.25%. Worth it only if you'll keep the mortgage long enough to recoup (usually 5+ years).
Closing costs are real
Expect 2–5% of the loan in closing costs: lender fees, title, taxes, escrow. Some can be negotiated; some can be rolled into the loan. Know the total cost, not just the rate, when comparing lenders.
Refinancing rules of thumb
Refinancing makes sense when the new rate is at least 0.5–1% lower, closing costs recover within 2–5 years, and you'll keep the home that long. Calculate the break-even before deciding.
Frequently asked questions
Should I pay off my mortgage early?
If the rate is below your expected investment return and you've maxed retirement accounts, the math favours investing. If peace of mind matters more, pay it off.
Can I get a mortgage with bad credit?
Yes, but at higher rates and stricter terms. Often worth improving credit first for substantial savings over the loan.
What's an escrow account?
Money your lender collects monthly to pay property taxes and insurance when due. Required for most low-down-payment loans.