Educational information, not individual financial advice.
Key Takeaways
A mortgage is the largest debt most households will ever take on. Understanding the structure, the major decisions, and when it makes sense to refinance is worth considerable effort given the dollar amounts involved.
A conventional mortgage is an amortizing loan secured by the property. Key parameters:
The monthly payment on a standard mortgage covers:
The acronym "PITI" captures these four: Principal, Interest, Taxes, Insurance.
Fixed-rate mortgage (FRM) — Rate is locked for the entire term. 30-year fixed is the U.S. default. Advantages: payment certainty, protection against rate increases. Disadvantages: typically higher rate than the initial rate on an ARM.
Adjustable-rate mortgage (ARM) — Rate is fixed for an initial period (commonly 5, 7, or 10 years), then adjusts periodically based on a benchmark rate plus a margin. A "5/1 ARM" is fixed for 5 years, then adjusts every year.
ARMs can make sense if:
The 2008 crisis exposed what can happen when ARM borrowers can't handle the reset. Most borrowers today choose fixed.
20% down has traditionally been the standard floor. Below 20%, most lenders require Private Mortgage Insurance (PMI), which protects the lender (not you) against default. PMI typically costs 0.5–1.5% of the loan amount annually, paid via the monthly payment.
PMI can be removed once you build 20% equity, though the process varies:
Low-down-payment options include:
Discount points are prepaid interest — you pay cash upfront to reduce your rate. Each point is typically 1% of the loan amount and reduces the rate by about 0.25%.
On a $400,000 loan, one point costs $4,000 and might reduce the rate from 6.5% to 6.25%. Monthly payment drops by about $65. Break-even on that cash: $4,000 / $65 = 62 months, or just over 5 years.
Points are worth paying if:
A 15-year mortgage typically has a rate 0.5–1% lower than a comparable 30-year, and by definition halves the term. Both combine to dramatically lower total interest.
On a $300,000 loan:
15-year saves ~$234,000 in interest but requires ~$600/month more in payment. This is a savings-rate question in disguise: you're effectively forced-saving the difference.
Alternative: take the 30-year and prepay monthly. Gives you the flexibility to stop prepaying if cash is tight, at the cost of a slightly higher rate.
Refinancing replaces your existing mortgage with a new one, typically at a lower rate. Rule of thumb: it's worth considering when rates drop 0.75–1% below your current rate and you'll hold the loan long enough to cover closing costs.
Closing costs on a refinance are typically 2–5% of loan amount. On a $300k refinance, that's $6,000–$15,000 upfront. If you save $200/month on the new payment, break-even is 30–75 months.
Cash-out refinances (borrowing more than your current balance and pocketing the difference) can be useful for specific goals — debt consolidation at a lower rate, home improvements — but are also the mechanism by which many homeowners re-lever themselves after years of paying down.
Mortgage interest on up to $750,000 of acquisition debt (post-2017 loans) is deductible as an itemized deduction on a primary and one secondary home. For most homeowners with the standard deduction ($32,200 MFJ in 2026), this deduction doesn't apply because they don't itemize.
If you do itemize and are in the 24% bracket, a $15,000/year mortgage interest bill saves $3,600 in taxes — the effective rate on that mortgage drops from, say, 6% to roughly 4.56%.
Mortgages in Horizons amortize like other liabilities, with the engine tracking interest, principal, and remaining balance. Linked expenses (property tax, homeowners insurance, PMI) can be tied to the mortgage so they end appropriately when relevant (PMI at 20% equity, mortgage payment when paid off).
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