Mortgages in plain English

What a payment is made of

A typical payment is PITI: principal (paying the loan down), interest (the cost of borrowing), taxes, and insurance — the last two usually collected monthly into escrow and paid by your servicer. Early on, most of your payment is interest; the balance shifts toward principal over the years. That's amortization, and it's why extra principal payments early in a loan punch above their weight.

The menu

• Conventional — the standard; as little as 3% down, mortgage insurance drops off once you reach 20% equity
• FHA — easier credit qualification, 3.5% down, but its insurance typically lasts the life of the loan
• VA — for eligible veterans and service members: zero down, no monthly insurance (see the VA track)
• Fixed vs. adjustable — fixed for certainty; ARMs price lower initially and fit shorter horizons
• 15 vs. 30 year — 15 builds equity dramatically faster; 30 keeps the payment livable; you can split the difference by paying a 30 like a 15

Points and rate shopping

Discount points are prepaid interest — cash now for a lower rate for the life of the loan. Divide the cost by the monthly savings to find the break-even month, and buy points only if you'll comfortably own past it. When comparing lenders, compare full Loan Estimates on the same day — rate, points, and lender fees together — not advertised rates in isolation.

Rate vs. APR?