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Basic Mortgage Terms
By: Joseph Kenny
If it is your first time applying for a mortgage, there are a number of terms
you should know. Educating yourself on the various mortgage terms you will run
into will help you make better decisions when deciding which home you want to
purchase. When you sign a mortgage contract, your home is used for collateral
and it is your responsibility to make sure your payments are made on time each
month.
The first term you should know is principal. The principal is basically defined
as the amount of money you borrow for your home. Before the principal is
provided you will need to make a down payment. A down payment is the percentage
you will put towards the principal. The amount of the down payment will often
depend on the cost of the home. Once you pay off the principal, the home is
yours.
The next term you will need to know is interest. Interest is a percentage that
you are charged to borrow a certain amount of money. Along with the interest
rate, lenders may also charge you points. A point is a portion of the total
funds financed. The principal and interest makes up the majority of your monthly
payments, and this is a method that is called amortization. Amortization is the
method by which your loan is reduced over a given period of time. Your payments
for the first few years will cover the interest, while payments made later will
be applied towards the principal.
A portion of your mortgage payments can be placed in an escrow account in order
to go towards insurance, taxes, or other expenses. The next term you will hear a
lot is taxes. Taxes are the amount of money that you have to pay to your state
or government. When it comes to your home, these are known as property taxes.
These taxes are used to build roads, schools, and other public projects. All
homeowners must pay property taxes.
Insurance is another important term that you will hear in the real estate
community. You will not be allowed to close on your mortgage if you don't have
insurance for your home. Home insurance covers your home against floods, fire,
theft, or other problems. Unless you can afford to repair your home if it is
damaged, it is usually a good idea to get insurance for your home. If your home
is located within a zone that is known for having floods, federal laws may
require you to have flood insurance.
If the down payment you put towards your home is less than 20% of the total
value, you will often be charged additional premiums on your insurance by the
lender. This is done to protect you in the event that you default on your loans
and fail to make payments. Without this, many people would not be able to afford
a house. Once you have paid off about 78% of the home, the lender will stop
charging you insurance premiums.
These are the basic terms you will need to know before your purchase a home.
Understanding these things will allow you to avoid many of the pitfalls that
exist in the real estate field. You want an interest rate that is low, and you
should always try to get a fixed interest rate if possible. This will allow you
to focus your income on making payments towards the principal, and this will
help you pay off the loan faster. A mortgage is an important part of your
financial picture, and you want to make sure you pick a home that you can
afford. If you fail to make your payments, you may lose your house.
About the Author:
Joseph Kenny writes for the UK Loan Store, visit them here, Loans Store and more
information on what a mortgage is, available on site. |
