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Home Loan Basics
By: Dave Lewis
If you’re getting ready to apply for your first home loan, you’re going to need
to understand the home loan basics.
Home Loan Basics
When you go to apply for a home loan, you need to understand the terminology.
Let’s start with the most basic of terms.
1. Principal – The principal is simply the amount you borrow to move into the
home of your desires. If you apply for a loan of $250,000, the amount the bank
actually gives you is the principal amount.
2. Interest – Every home loan comes with an interest rate. The interest rate is
the amount a lender is charging you to borrow the principal. Interest rates are
typically the key to a loan as there are a wide variety of loans that have
flexible interest rates that change every year, ever few years or simply remain
set over time. In general, you want to minimize the interest rate as much as
possible.
3. Term – The term of the loan is simply the number of months you have to repay
the money you’ve borrowed from the lender. For instance, a 30-year fixed rate
mortgage is indicative of a term of 360 monthly payments to be made over 30
years. Don’t worry, there are loans of much shorter periods of time.
Amortization
Amortization is not only a mouthful, it is the one term that may confuse you
during the loan process. First time home buyers often mistakenly assume the same
amount of interest and principal will be reduced in each loan payment.
Unfortunately, lending institutions are not willing to go about it this way,
which leads us to amortization.
With amortization, lenders typically apply many of the initial payments on your
mortgage almost entirely to the interest owed on the loan. If your loan calls
for monthly payments of $1,000, the first payment may have $900 applied to
interest and only $100 applied to the principal. As the months pass, the amount
paid on the principal will increase. Yes, it is maddening.
About the Author:
Dan Lewis is with http://www.gwhomeloans.com - San Diego mortgage brokers providing San Diego home loans. Visit http://www.gwhomeloans.com/services.html to learn more about options on San Diego mortgages from a San Diego mortgage
broker company. |
