A Basic Guide to Mortgages

Mortgage is the term use to refer to the loan that one has made in order to buy real estate, usually a house. The mortgage serves as a legal claim or a lien on a property as a security that the borrower would pay the debt. In other words, the house is the collateral to the loan. If the borrower fails to make payments, the lender is within his right to take away the property. Monthly payments are usually required to repay the loan with interest, taxes, and insurance included. The loan payments could last until 15 to 30 years, depending on the contract.

The terms you would usually encounter when talking about mortgages are the principal, interest, taxes, and insurance. The principal is the original sum of money that is loaned. Interest rates are the charges that the lender assigns for the use of his money. The lender could charge additional loan costs and points. The taxes in mortgages refer to the community property taxes based on the value of the house or property. Unless the house has insurance, lenders would not agree to close a transaction with the borrower.

Factors that affect the amount of mortgage payment include: the mortgage interest rate, cost of mortgage insurance, size of down payment, repayment term, amount of property taxes, and amount of annual homeowners insurance premiums. The homeowner or borrower would be paying the mortgage through monthly payments of principal and interest gradually. The payments are planned so that at the end of a fixed period of time, the house would be fully owned by the owner and be debt-free. Usually, during the first few years, the homeowner would be paying for the interest. It is during the final years that the payments are made to clear off the principal. This is referred to as amortization. If, however, the homeowner sells the house before the loan is paid off, he would still be required to pay back what remains of the principal balance due on the mortgage loan.

There are several types of mortgages. Fixed rate mortgages offer an interest rate that remains fixed over the duration of the loan. In adjustable rate mortgages, the interest rate changes over time. It is an advantage if the interest rates go down because it means that you would be paying a low interest rate too. Also, there would be reduction of initial payments if there are low start rates.

In a balloon mortgage, the principal and interest payments remain the same for the term of a balloon mortgage, usually about 5-7 years. Amortization of the principal and interest rates, however, is over 30 years. The good thing about this is that one could reapply for refinance after the mortgage has been paid off. The home loan repayment relief mortgage offers a three-year adjustable rate at one percent below the national rate for the same type of loan. Three years after, the rate is adjusted yearly to follow market rates. The homeowner could save money because of the affordable rate and enjoy full ownership of his property sooner.