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What is a Mortgage?
A mortgage is a loan specifically for buying a home. The home itself serves as collateral — if you stop paying, the bank can take the house.
Your monthly payment typically includes:
- P&I — Principal and Interest (the actual loan payment)
- Property Tax — Local taxes on your property
- Insurance — Homeowner's insurance
- PMI — Private Mortgage Insurance (if down payment < 20%)
The mortgage payment shown by banks is often just P&I. Your actual monthly cost with taxes and insurance can be 30-50% higher!
Down Payment Explained
| Down Payment | Pros | Cons |
|---|---|---|
| 3-5% | Get in sooner, keep cash for emergencies | Higher payments, PMI required |
| 10% | Balance of both | Still need PMI |
| 20% | No PMI, lower payments, better rates | Takes longer to save |
| 25%+ | Best rates, most equity | Ties up cash |
Fun Facts 🎉
🏠 The True Cost of a $400,000 Home
With 20% down, 6.5% rate, 30 years:
- You pay: $320,000 (loan amount)
- Interest over 30 years: $408,000
- Total cost: $728,000 (almost 2x the price!)
💸 The PMI Trap
PMI typically costs 0.5-1% of the loan annually:
- $320,000 loan × 0.75% = $2,400/year ($200/month)
- Until you reach 20% equity, that's money down the drain
🏦 15 vs 30 Year Mortgage
For a $320,000 loan at 6.5%:
| Term | Monthly P&I | Total Interest |
|---|---|---|
| 30 years | $2,022 | $408,000 |
| 15 years | $2,787 | $181,000 |
15-year saves $227,000 but costs $765 more per month.
🎯 The 28/36 Rule
Banks use this to determine how much you can borrow:
- 28%: Housing costs should be ≤ 28% of gross income
- 36%: Total debt payments ≤ 36% of gross income
If you earn $8,000/month:
- Max housing payment: $2,240
- Max total debt: $2,880
Hidden Costs of Homeownership
Beyond your mortgage, budget for:
| Cost | Typical Amount |
|---|---|
| 🔧 Maintenance | 1-2% of home value/year |
| 🔨 Repairs | $3,000-5,000/year average |
| 🌳 Landscaping | $100-300/month |
| 🔌 Utilities | Higher than renting |
| 🏠 HOA Fees | $200-500/month (if applicable) |
The "rule of thumb" is to budget an additional 1-3% of your home's value per year for maintenance and repairs. On a $400,000 home, that's $4,000-12,000/year!
Smart Mortgage Tips
1. Get Pre-Approved First Know your budget before house hunting.
2. Compare Multiple Lenders Rates vary! A 0.25% difference saves thousands.
3. Consider Total Monthly Cost Don't just look at P&I — factor in taxes, insurance, HOA.
4. Build Emergency Fund First Have 3-6 months of payments saved before buying.
5. Don't Max Out Your Budget Just because you qualify for $500K doesn't mean you should spend it.