One of the first steps in buying a new home is to take a realistic look at what you can afford and how you are going to pay for it. If you are like most people, you will probably have to finance your home purchase with a mortgage loan. What follows is an explanation of terms and options to understand when considering what mortgage is right for you.
What is a mortgage?
A mortgage is a loan that uses the home you buy as security. This loan is registered as a legal document against the title of your property. Here’s a quick overview of some of the most common aspects of a mortgage that you need to understand.
• Amortization period
• Maturity date
• Payment schedule
The principal is the amount of the loan, or the cash actually borrowed. The interest is the amount the lender Charges for the use of funds, or principal. Interest rates vary according to many factors, including terms and conditions of the mortgage as well as a borrower’s credit history. Mortgage payments are usually applied toward both principal and interest.
The amortization period is the actual number of years that it will take to repay the entire mortgage loan in full. This normally ranges from 15 to 25 years but can be extended in certain circumstances. A longer amortization period will result in lower payments but it will take that much longer to pay off your mortgage which in turn means you will pay more interest. You should select the shortest period you can afford.
The term is the length of time for which a mortgage agreement exists between you and your lender. Typically, terms range between six months and ten years. A longer term means you will keep the interest rate agreed upon for that longer length of time. Rates vary with the term and the difference in payments and interest costs can be calculated by your mortgage professional. Once your term is up you are able to reevaluate your financial situation and consider new term and amortization periods.
The maturity date marks the end of the term, when you can either repay the balance of the principal or renegotiate the mortgage at interest rates in effect at
that time. If you should choose to repay the balance or renegotiate the mortgage before this date, penalties may be charged.
Payment schedule is the frequency at which you will make your mortgage payments. These can occur monthly, semi-monthly (twice a month), biweekly (every other week), or weekly. Generally, more frequent payments can result in lower interest costs over the life of your mortgage.
Check back to my site on Thursday for information on some mortgage options: