Mortgage Basics Mortgage, simply put, is a loan in which you get an amount of money agreed upon against your house. You need to pay back the loan within a stipulated time, failing which the bank or whoever is the lender will have the complete ...
Mortgage, simply put, is a loan in which you get an amount of money agreed upon against your house. You need to pay back the loan within a stipulated time, failing which the bank or whoever is the lender will have the complete rights of taking your home away from you. This process, in legal terms is called foreclosure. Banks are the most popular mortgage providers but not the only ones. People usually look for the best rates available in the market when they get a mortgage since it is pretty much the biggest collateral they will be signing up for. Thus, it is not necessary that you need to get the loan from the bank you have an account at for a long term – in fact, mortgage brokers often come of great help since they deal with a lot of people and will find the best rates for you. What you need to keep in mind is that mortgage involves a lot of additional costs which are otherwise not included in case of other loans. Here is a list of such costs and terminologies which you need to know:
- Down payment– This is the lump sum amount you need to pay which will reduce both the amount you need to borrow and your monthly repayments.
- Principal and Interest– While principal is the amount of money you are borrowing from the lender, the interest is the extra amount that you are being charged for borrowing the money. This is calculated on the basis of a percentage levied on the principal.
- Insurance– You will need to protect your house from hazards by getting homeowners insurance so that in case of any accident, you can rebuild or restore your house and the lender is not in any trouble.
- Amortization– This is the process through which you go for post mortgage sanction – that is, the repayment of the principal and the interest.
In the initial days of mortgage loans, there used to be only the 30 year fixed mortgages where you had to repay the loan over a period of 30 years and thus it often happened that the interest rates exceeded the rate of premiums. The situation has improved after the arrival of the adjustable rate mortgage or the ARM. The adjustable rate mortgage allows the interest rates to be changed once a year according to the condition of the market and this has an effect on the monthly repayments. ARMs can also be fixed over six months, one year, two years and more and there are caps to control the change in interest rates over your loan repayment period.
When getting a mortgage loan, don’t forget that you can always bargain for a better rate. Don’t be shy to ask. While the ARM and the fixed rate mortgage each have its advantages and disadvantages, you need to see which one suit your situation better. If you have a stable job and see a secured future ahead you can choose the fixed rate one since the ARM has a strong implication on the monthly payments. Think carefully and consult a specialist before taking any decision.