Buying a House: Mortgage Types & Loan Length Video

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  • 0:00 Introduction to Buying a House
  • 0:30 Components of a Mortgage Loan
  • 3:13 Federal Housing Authority Loan
  • 4:16 Conventional Loan
  • 4:42 Veterans Administration Loan
  • 5:17 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll discuss the three types of mortgage loans: Federal Housing Authority, conventional, and Veteran's Administration. You'll also learn about the two main repayment options: 15 years and 30 years.

Introduction to Buying a House

After years of working hard and saving money, Jan is finally ready to purchase her first home. Because she has little knowledge of home ownership, Jan decides to attend a home-buying seminar before she starts house-hunting. The speaker starts by defining a mortgage, which is a loan to purchase a home. Then the speaker explains that the seminar will cover the components of a mortgage loan and the three main types of mortgage loans: Federal Housing Authority, conventional, and Veteran's Administration.

Components of a Mortgage Loan

The home buying process can be exciting as well as daunting. Let's say you find a home for $100,000 and you apply for a mortgage loan. The amount you are borrowing is called the principal. The speaker goes on to say it would be great if the bank allowed us to borrow and pay back $100,000 only; but how would the bank make any money? For this reason, the bank charges us interest. Interest is the cost to borrow money and is based on several personal factors: income, credit score, how much we owe others, and the length of the loan or maturity. Interest payments do add up for homeowners, but they help at tax time to reduce their federal tax liability.

There are two main loan maturities in which our mortgage payment can be calculated: 15 years or 30 years. Let's say we obtain a $100,000 mortgage, payable in 15 years with 5% interest. Our monthly payment would be $790.70, and we would incur total interest of $42,342 over 15 years. In sum, we will pay $142,342 ($100,000 principal + $42,342 interest) for this home. Now if we decided on a 30-year maturity for the same $100,000 home and 5% interest, our payment would be $536.82, a lot less than the 15-year loan. However, since we're paying a lower monthly payment, the amount of interest we pay over the life of the loan would total $93,255.78 for a total payoff of $193,255.78 at the end of 30 years.

Jan raises her hand and asks, 'Why would someone take out a 30-year mortgage and pay all of that interest?' The speaker explains that the benefit of a 30-year mortgage, besides the tax benefit, is a lower payment, which may be the only way an applicant can qualify for the mortgage. A 30-year loan may also be the only affordable option for the buyer when other expenses are considered. Keep in mind that choosing a 15-year or 30-year mortgage will depend on each individual's financial situation and goals. However, remember the interest is tax-deductible each year. For example, say that you made $50,000 last year, and you paid $10,000 in mortgage interest. Your taxable income is $40,000 ($50,000 - $10,000) not including other deductions allowed by the Internal Revenue Service. So obtaining a mortgage definitely has its benefits. Now let's look at the different types of mortgage loans that banks offer.

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