What Is a Mortgage?

A mortgage is a loan that is used to finance the purchase of a home. We offer multiple mortgage options designed to meet the financial needs and goals of a diverse range of home buyers.

A Guide to Understanding Home Loans

We want to provide you with all of the information you need to make confident, educated decisions about your finances. It is important that you clearly understand the basics of a mortgage before you apply for financing, especially if you are a first-time homebuyer.

We put the mortgage loan process into plain English to help you understand the home buying process.

Call 1.888.546.2634 to speak to a friendly, expert BofI USA Mortgage Consultant who will create a loan package that is just right for you.

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Mortgage Basics

In simplest terms, a mortgage is a loan used to finance the purchase of a home. The loan is secured by the property you purchase and represents a legally binding contract. For most people, a mortgage represents the largest debt they will ever assume, as well as the longest contract they will ever enter into. Most mortgages last between 15 and 30 years.

As mentioned, mortgages are composed of several components—the collateral used to secure them, the principal and interest payments, taxes, and insurance.

In addition, there are two primary types of mortgage products—"fixed rate" mortgage loans and "adjustable rate mortgage" (ARM) loans. A fixed rate mortgage features payments that remain the same throughout the life of the loan. An ARM begins with a lower initial interest rate and payment, but it will adjust with the market after a fixed period of time. We invite you to , including the advantages and disadvantages of each.

Key Components of a Mortgage

Collateral: The house you purchase serves as collateral for the mortgage loan. If you fail to repay the loan, the bank can take the house in lieu of repayment.

Principal and Interest: Principal is the amount of money you borrow to finance the purchase of your home. The interest is the additional amount you agree to pay, usually expressed as a percentage, in order to secure the principal amount.

Taxes: The taxes you pay on your property are generally proportional to the value of your home.

Insurance: In order to close the deal on your home, you will have to acquire homeowner's insurance. Depending on the type of mortgage, the terms of the mortgage, and your down-payment, you may also be required to purchase Private Mortgage Insurance (PMI). PMI is typically required if your down-payment is less than 20% of the purchase price.

Discount Points

Discount Points are fees that you pay to your lender, at close, in exchange for a lower interest rate over the life of your mortgage. As a result of this one-time payment, also known as a prepaid interest payment, you will have a lower monthly mortgage payment.

The cost of each Discount Point is equal to 1 percent of the principal loan amount. Therefore, if your principal loan amount is $200,000, 1 Discount Point would equal $2,000.

Whether paying Discount Points makes sense in your case depends, in part, on how long you plan to stay in your home. To help you decide whether you should include Discount Points , use these steps when calculating your mortgage:

  1. Calculate the amount of your monthly payment at the interest rate you would be charged if you do not pay Discount Points.
  2. Calculate the amount of your monthly payment at the lower rate if you were to pay Discount Points.
  3. Deduct the lower payment from the higher payment to find the amount you would save each month.
  4. Divide the amount charged for Discount Points at closing by the amount you would save each month. The result is the number of months you would have to stay in your home in order to reach the break-even point on paying Discount Points.

Types of Home Loans

Get to know the mortgage options available to you. Our guide below includes our most popular home loans, including the key benefits that can help you determine which option is best suited to your needs.

Mortgage Key Benefits A Good Fit for You...
: Interest rate of the loan does not change for the life of the loan.
  • The lowest fixed rates
  • No sudden payment changes
  • Plan to stay in your home for a fair amount of time
  • Can put at least 5% down
: lowest rate for the first 3-10 years of the loan.
  • The lowest short-term rates
  • Initial lower monthly payments
  • Know you'll be moving within the next few years
  • Can put at least 5% down
: low interest rates for higher-priced properties.
  • Higher purchase limits
  • Industry-leading low rates
  • Fixed-rate and ARM options
  • Are buying a home that exceeds conforming loan limits ($417,000 in most areas)
  • Can put at least 20% down
: low rates for the higher-priced properties.
  • Low down payments
  • Flexible qualification guidelines
  • Fixed-rate and ARM options
  • Have limited cash for a down payment
  • Don't have an established credit history or have a low credit score because of past challenges
: Low interest loans backed by the government for the military.
  • Little or no down payment
  • No mortgage insurance required
  • Flexible qualification rules
  • Fixed-rate and ARM options
  • Are an active military member or veteran
  • Are the surviving spouse of a service member who died as a result of military service