Yahoo Finance Spotlight: What Is A Mortgage?

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In this Yahoo Finance review, we outline some of the most important steps in buying a new home and break down the different parts of a mortgage loan.

Video transcript

ADAM SHAPIRO: With mortgage rates close to historic lows and US home prices hitting record highs, you may hear the term mortgage more often than in years past.

TEENDI KAPFIDZE: Mortgage rates are likely to remain attractive for a long time, possibly throughout this year, until 2022.

ADAM SHAPIRO: So what is a mortgage and is it worth thinking about getting it? Simply put, a mortgage is a loan that uses property as collateral to help a buyer acquire a home. There are many different types of mortgages, and choosing the right one for you will depend on several factors, including your loan and the type of property you want to buy.

There is a conventional loan secured by a private lender such as a bank or credit union, a government-issued FHA loan, a federal government insured that does not require a large down payment or a high credit rating, and there is a giant mortgage. As the name suggests, these are loans that exceed the limits set by the Federal Housing Finance Agency and cannot be guaranteed because they are more risky.

A typical mortgage is paid over 15 or 30 years. It depends on the loan term that you agree to. Once you get the mortgage you want, your monthly payments will be in two parts: principal and interest. The principal is the money you originally borrowed to buy the house. Interest payments are fees you pay to the lender to borrow money. This is based on a number of factors, most notably the Fed funds rate set by the Federal Reserve Bank, which, as you may have heard, is actually close to zero.

JEROME POWELL: In terms of interest rates, we continue to expect it to be prudent to maintain the current target range of 0% to 0.25% for the federal funds rate until labor market conditions reach levels in line with the maximum employment committee assessment. and rising inflation. up to 2% and may moderately exceed 2% for some time.

ADAM SHAPIRO: The total amount of interest you pay on your mortgage will vary depending on the interest rate and the term of the loan. And by reducing that 15% to, say, 3%, you can see how much this will affect your total payment over time. This ultra-low rate is one of the reasons the real estate market is booming and why the term mortgage is popping up in conversations across America.

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