Basic Mortgage Terms
If it is your first time applying for a mortgage, there are a number
of terms you should know. Educating yourself on the various mortgage
terms you will run into will help you make better decisions when deciding
which home loan you use to finance. When you sign a mortgage contract,
your home is used for collateral and it is your responsibility to
make sure your payments are made on time each month.
The first term you should know is principal. The principal is basically
defined as the amount of money you borrow for your home. Before
the principal is provided you will need to make a down payment.
A down payment is the percentage you will put towards the principal.
The amount of the down payment will often depend on the cost of
the home. Once you pay off the principal, the home is yours.
The next term you will need to know is interest. Interest is a percentage
that you are charged to borrow a certain amount of money. Along
with the interest rate, lenders may also charge you points. A point
is a portion of the total funds financed. The principal and interest
makes up the majority of your monthly payments, and this is a method
that is called amortization. Amortization is the method by which
your loan is reduced over a given period of time. Your payments
for the first few years will cover the interest, while payments
made later will be applied towards the principal.
A portion of your initial mortgage payments may be placed in an escrow
account in order to go towards insurance, taxes, or other expenses.
The next term you will hear a lot is taxes. Taxes are the amount of
money that you have to pay to your state or local government. When
it comes to your home, these are known as property taxes. These taxes
are used to build roads, schools, and other public projects. All homeowners
must pay property taxes.
Insurance is another important term that you will hear in the real
estate community. You will not be allowed to close on your mortgage
if you don't have insurance for your home. Home insurance covers
your home against floods, fire, theft, or other problems. Unless
you can afford to repair your home if it is damaged, it is usually
a good idea to get insurance for your home. If your home is located
within a zone that is known for having floods, federal laws may
require you to have flood insurance.
If the down payment you put towards your home is less than 20% of
the total value, you will often be charged additional premiums on
your insurance by the lender. This is done to protect you in the
event that you default on your loans and fail to make payments.
Without this, many people would not be able to afford a house. Once
you have paid off about 78% of the home, the lender will stop charging
you insurance premiums.
These are the basic terms you will need to know before your purchase
a home. Understanding these things will allow you to avoid many
of the pitfalls that exist in the real estate field. You want an
interest rate that is low, and you should always try to get a fixed
interest rate if possible. This will allow you to focus your income
on making payments towards the principal, and this will help you
pay off the loan faster. A mortgage is an important part of your
financial picture, and you want to make sure you pick a home that
you can afford. If you fail to make your payments, you may lose
your house.
Joseph Kenny writes for the UK Loan Store
Recomended reading: Mortgages
For Dummies, 2nd Edition
a comprehensive introduction for anyone who is contemplating a mortgage.
This book tells you how to evaluate your creditworthiness, borrowing
power, and shop for a lender, as well as covering the various types
of loans. The authors also devote a section to refinancing and discuss
what you should consider when prepaying a loan. They include amortization
and remaining-balance tables, and a useful glossary. Whether you're
a first-time home buyer or are just looking to refinance, you'll find
this a valuable, easy-to-use guide.
