Mortgage Basics
Mortgage the terms means to pledge. A mortgage is an agreement to give up an interest in something if one fails to perform some duty. Usually, mortgage and home loan may be used interchangeably. If a customer has decided to buy a house and has shopped for the same, he or she may then buy the property from the seller by paying in full up-front if he has the means. In case, the customer can raise a part of the total cost and the remaining is paid by a third party with which the customer has entered into an agreement with, then it may be said that the customer has availed of a mortgage on his home. The customer thus in effect borrows money from the third party or lender and pays interest and fees on the amount taken in the form of loan usually in agreed number of payments. In such a case, the money repaid to the lender would be higher than the actual loan amount.
Before availing of a mortgage loan it may be beneficial for the borrower to first shop for the home and determine whether the home fits hir or her needs and pocket. The next step would be shopping for the mortgage. It would always be prudent to check all the available mortgage options. There are many banks and financial institutions that offer mortgage loans. There are some mortgage loan programs offered by the federal government and state governments as well.
Mortgage loans may be generally categorized as fixed rate mortgage and varying rate mortgage. Before availing any home, it would be prudent to be aware of some of the terms that are used in mortgage. Some of the terms used would be rate of interest, principal amount availed, annual percentage rate and escrow. Principal is the actual amount of loan availed. The annual percentage rate (APR) would be the cost of credit and is calculated as the yearly amount a consumer must pay for acquiring a loan. Escrowis a way of transferring or exchanging property and/or money using a neutral third party.
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fixed rate mortgage may be defined as one where the rate of interest remains constant throughout the tenure of the loan. It would mean that if one availed a mortgage loan for 5 percent fixed for 25 years, then the borrower would pay 5 percent interest on the principal availed for the complete tenure of 25 years. This type of mortgage may be viewed as most low-risk. The obvious advantage of this type of loan may be that the monthly payments would remain the same which allows for good budgeting decisions. This type of mortgage may also protect the borrower from increase in interest rates on the open market. The obvious downfall of fixed mortgage would be that in case of lowering of interest rates in the open market, the rate of interest on the loan would still remain same. While evaluating afixedratemortgage, borrowers may ask the lender for disclosures on how much will be paid over the life of the loan, and whether or not there would be a
prepayment penalty.
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mortgage loan can also be availed for a variable/adjustable rate of interest. This kind of mortgage is dependent on the open market. The amount paid towards the loan would vary as the rate of interest varies. This would mean that the borrower may not be able to plan his monthly budget in advance. There however may be an advantage when the interest rates in the market fall. There may be financial institutions and banks that offer a combination of both types of mortgages. Usually, the combination mortgages would involve the first few years of fixed mortgage rates and the following years may be adjustable or vice-versa. It would therefore be advisable to do a research before deciding on the type of loan that you want to avail.
by: Ask Bill
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