| Basically,
a mortgage is just a loan that is to be used to finance the purchase
of property. The property itself is used as security to ensure repayment
and the lender holds the title or deed to the property either directly
or indirectly (depending on your jurisdiction and type of lender)
until you have repaid the entire amount plus interest.
When shopping
for a mortgage you should keep in mind that there are many different
types available. They can range from fixed rate mortgages where
the interest rates never change, to adjustable rate mortgages (ARM's)
where interest rates are pegged to some type of market index, allowing
them to rise or fall over time as the economy changes. Between these
two extremes are a variety of other products that attempt to blend
the advantages of the guaranteed interest rates of fixed rate mortgages
with the flexibility found in adjustable rate mortgages. The length,
or "term" of a mortgage, is also an important factor to consider.
You can choose between short-term mortgages that need to be renegotiated
every few years (called "balloon" mortgages), and long-term mortgages
where you lock your loan in for up to 30 years.
One of the
most important things you need to do before committing to any type
of mortgage is to sit down with a mortgage professional and examine
the advantages and disadvantages of all available options and determine
which product is best suited to your current situation and future
plans.
The Basic
Components Of A Mortgage:
- Mortgage
Amount:
The total amount of money to be borrowed by the Purchaser and
applied toward the price of the property. In general, the mortgage
amount plus down payment equals purchase price.
- Down Payment:
The amount of money provided by the Purchaser toward the purchase
price of the property (not including legal fees or other acquisition
costs). In general, down payment plus mortgage amount equals purchase
price.
- Interest
Rate:
The actual cost of borrowing money, charged as a percentage of
the outstanding amount owed. Usually compounded on a monthly basis.
- Term of
the Mortgage:
The period of time during which the loan contract is active. During
this period the borrower makes periodic payments (usually monthly)
to the lender and at the end of the term the balance of the loan
becomes due and payable.
- Amortization
Period:
The period of time after which, if all monthly payments are made
on time and in full, the loan will be paid out. The term and the
amortization of a mortgage are often the same, but do not need
to be. Instead of having a 30-year mortgage term with a standard
30-year amortization, the borrower could opt for three 10-year
terms (called balloon mortgages). At the end of each term the
borrower would have to refinance the loan, necessitating renegotiation
of the interest rate and payment schedule with the lender.
- Discount
Points:
Discount points refer to the additional money the borrower may
pay to the lender on closing to get a lower interest rate on the
loan. The cost of one point equals 1% of the amount borrowed.
This means that one point on a $150,000 mortgage equals $1,500.
Usually, for each point paid for on a 30-year loan, the interest
rate is reduced by about 1/8th (or 0.125) of a percentage point.
- Prepayment
Privileges:
The right of the borrower to pay out all or part of the outstanding
principal before it comes due. These privileges are usually set
out in the initial mortgage negotiations between the borrower
and lender and will differ depending on the type of mortgage.
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