Financing Explained
What are the basic components
of a mortgage loan?
A mortgage requires you to pledge your home as
the lender's security for repayment of your loan. The lender agrees
to hold the title or deed to your property (or in some states,
to hold a lien on your title or deed) until you have paid back
your loan plus interest.
Mortgage Amount and Term
The mortgage amount is the amount of money you borrow from a lender
to pay for your house. The term is the number of years over which
you can pay back the amount you borrow.
Amortization
Over time, you will repay your mortgage through regular monthly
payments of principal and interest. During the first few years,
most of your payments will be applied toward the interest you
owe. During the final years of your loan, your payment amounts
will be applied primarily to the remaining principal.
Fixed or Adjustable Interest Rates
A fixed-rate loan gives you the security of knowing that your interest
rate will never change during the term of the loan. An adjustable-rate
mortgage (called an ARM) has an interest rate that will vary
during the life of the loan, with the possibility of both increases
and decreases to the interest rate and consequently to your mortgage
payments.
Down Payment
The down payment is the part of the purchase price the buyer pays
in cash and is not financed with a mortgage. Your down payment
will reduce the amount you'll need to borrow. So, the more cash
you put down, the smaller the size of your loan, and the smaller
the amount of your mortgage payments.
Closing Costs
The closing (or, in some parts of the country, settlement) is the
final step, during which ownership of the home is transferred
to you. The purpose of the closing is to make sure the property
is ready and able to be transferred from the seller. The closing
costs (which vary from state to state) are usually expressed
as a percentage of the sales price or loan amount. Typically,
costs range from 3% to 6% of the price of your home and can include
transfer and recordation taxes, title insurance, the site survey
fee, attorney fees, loan discount points, home inspection, appraisal,
prorations, taxes and document preparation fees.
Discount Points
In the special vocabulary of mortgage lending, "points" are
a type of fee that lenders charge. (The full term to describe this
fee is "discount points.") Simply put, a point is a unit
of measure that means 1% of the loan amount. Discount points represent
additional money you can pay at closing to the lender to get a
lower interest rate on your loan. Usually, for each point on a
30-year loan, your interest rate is reduced by about 1/8th (or
.125) of a percentage point.
Additional Information
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