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Financial Literacy

Financial Literacy

Home Financial Literacy Mortgages Different Types of Mortgages

Different Types of Mortgages

Mortgages come in different flavors: short ones, fat ones, skinny ones, kids who climb on rocks (yeah, Armor hot dogs, the dogs kids love to bite). The most common mortgage is fixed, but just to fill you in: there is also “adjustable,” “negative amortization,” and a bunch of other flavors for how bankers sell you money. Some snapshots:

Fixed – This is not about Rover’s wife, Snowbell, not being able to have puppies because she got her little tubes tied. In this case, the 30-year fixed is the most common and traditional kind of loan, so to keep things simple at this point, we’ll just illustrate the 30-year story and let sleeping dogs… still be able to have puppies.

The basic idea of a fixed mortgage is that you have a fixed interest rate and a fixed monthly payment for the life of the mortgage. How does that work? The amount of interest vs. principal pay down changes over time. This type of loan pays off the entire amount of the principal borrowed over 30 years and it charges interest for whatever principal you still owe. If you started out with a $250,000 loan, on the first year you would be paying off .06 x $250,000 and approximately $15,000 in interest. Let’s pretend our interest is 6%. Once again, we just made that number up. We’re creative that way.

The first year you would have paid off a total of $3,384 in principal. At the end of the year you’d “only” owe $236,617 to be paid over the remaining 29 years. By year 20, you’ll owe $123,522 of principal, and that year you’ll only pay about $6,747 in interest. The rest of the 120 monthly fixed payments will go toward the reduction of principal. On the 360th monthly payment, you will get the full “title” to ownership of the home, the bank will stop bugging you every month for money and the entire home is yours. Welcome to the American Dream. It comes with a basketball hoop over the driveway.

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