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Understanding Your Mortgage

Mortgage Terminology

If you’re planning on buying a home, you may be a bit confused about the type of mortgage you should get and the terminology used to explain each option. We want to help – below you’ll find some of the most common language used to discuss mortgages and home ownership, as well as why each one matters.

Adjustable Rate Mortgage – an adjustable rate mortgage, known as an ARM, is a mortgage that has a fixed rate of interest for only a set period of time, typically one, three or five years. During the initial period the interest rate is lower, and after that period it will adjust based on an index. The rate thereafter will adjust at set intervals.

Amortization – the amortization of the loan is a schedule on how the loan is intended to be repaid. For example, a typical amortization schedule for a 15 year loan will include the amount borrowed, interest rate paid and term. The result will be a month breakdown of how much interest you pay and how much is paid on the amount borrowed.

Bi-Weekly Mortgage – this type of mortgage has an impact on when a loan is paid and how frequently. In a typical mortgage, you make one monthly payment or twelve payments over the course of a year. With a Bi-Weekly payment you are paying half of your normal payment every two weeks. This is the equivalent of thirteen regular payments, which in turn will reduce the amount of interest you pay and pay off the loan earlier.

Construction Mortgage – when a person is having a home-built, they will typically have a construction mortgage. With a construction mortgage, the lender will advance money based on the construction schedule of the builder. When the home is finished, the mortgage will convert into a permanent mortgage.

Equity – the difference between the value of the home and the mortgage loan is called equity. Over time, as the value of the home increases and the amount of the loan decreases, the equity of the home generally increases.

Fixed Rate Mortgage – is a mortgage where the interest rate and the term of the loan is negotiated and set for the life of the loan. The terms of fixed rate mortgages can range from 10 years to up to 40 years.

Good Faith Estimate – an estimate by the lender of the closing costs that are from the mortgage. It is not an exact amount, however, it is a way for lenders to inform buyers of what is needed from them at the time of closing of the loan.

Loan-to-value Ratio – this is another typical financial calculation that is done is called the Loan-to-Value (LTV) ratio. This calculation is done by dividing the amount of the mortgage by the value of the home. Lenders will generally require the LTV ratio to be at least 80% in order to qualify for a mortgage.

Mortgage – is the loan and supporting documentation for the purchase of a home. Mortgage lenders generally follow strict underwriting guidelines to limit the possibility of borrowers defaulting on their payments.

Origination Fee – when applying for a mortgage loan, borrowers are often required to pay an origination fee to the lender. This fee may include an application fee, appraisal fee, fees for all the follow-up work and other costs associated with the loan.
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What You Need To Know About Mortgage Payments

For many, understanding exactly what they are paying for in their mortgage can be tough. What’s the difference between “principal” and “interest”? Which should be paid first, and what percentages are best? Below we’ll help break down your mortgage payment and tell you what you need to know. kind of loan most people will obtain at some point in their life is a mortgage.

A mortgage is a kind of loan that a borrower takes out with the eventual goal of paying off a piece of real estate.

For most average people, the kind of mortgage they will need is one that covers the price of a house and the surrounding yard.

The monthly payments that are used to slowly pay off that loan are known as mortgage payments. As long as a person is making mortgage payments, the home will be held as collateral by the lender until the mortgage is completely paid off.

The Principal

One important term you should know in regards to your mortgage and mortgage payments is the principal. This is the original amount of the loan used to pay for the home when the mortgage was created.

When you make a mortgage payment, part of it should go towards paying of the principal. Paying off the principal completely means owning the home without the possibility of it being repossessed.

How much of a mortgage payment goes towards the principal really depends on the structure of the mortgage. With a fixed rate mortgage, for example, the total of the monthly mortgage payment will never change but the portion of that payment that is used to pay off the principal will.

In the beginning, most of the payment will go towards paying off interest. Later on, more and more will go towards paying off the principal

The Interest

Most of the mortgage payment not used for paying off the principal will be used to pay off the interest. Interest can be thought of as what a person pays to borrow money. It’s the way lenders like banks make a profit. The more a bank charges in interest, the more money it makes on the loan.

The interest portion of the mortgage payment is made up of two elements. These are the margin and the index. The index is the part of the interest that is calculated through the use of an interest rate.

The margin, on the other hand, can be thought of as the amount of profit that lender keeps for itself. As can be expected, the margin can vary widely.

If the borrower is deemed to be risky to lend to by the bank, the margin will be very high to help hedge against the risk. The borrower should certainly try to negotiate for a lower margin.
-via Banking Sense

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