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) 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.
Basic Components Of A Mortgage:
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.
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.
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.
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 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.
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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