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Mortgage Information
Mortgages Explained
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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.
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The Basic
Components Of A Mortgage:
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- 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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