Before buying a home and obtaining a mortgage, it’s important to understand various mortgage and lending terms to make informed decisions. Here are some key terms you should know:
- Mortgage: A mortgage is a loan provided by a lender to help finance the purchase of a property. The property itself serves as collateral for the loan.
- Principal: The principal refers to the initial amount of money borrowed for the mortgage. It does not include the interest charged on the loan.
- Interest Rate: The interest rate is the percentage charged by the lender on the principal amount borrowed. It determines the cost of borrowing and is typically expressed as an annual percentage rate (APR).
- Down Payment: The down payment is the initial payment made by the homebuyer when purchasing a property. It is typically a percentage of the property’s purchase price and is paid upfront. A higher down payment can lower the loan amount and monthly mortgage payments.
- Amortization: Amortization refers to the process of paying off the mortgage over time through regular payments. Each payment consists of both principal and interest, with the proportion of each varying over the loan term.
- Loan Term: The loan term is the duration for which the mortgage is taken. Common loan terms include 15, 20, or 30 years. Shorter loan terms generally have higher monthly payments but result in less interest paid over the life of the loan.
- Fixed-Rate Mortgage: A fixed-rate mortgage has an interest rate that remains constant throughout the loan term. This means the monthly mortgage payment also remains the same. It provides stability and predictability.
- Adjustable-Rate Mortgage (ARM): An adjustable-rate mortgage has an interest rate that can change over time. Typically, ARMs have a fixed rate for an initial period (e.g., 5 years) and then adjust periodically based on market conditions. The monthly payments can fluctuate accordingly.
- Closing Costs: Closing costs are fees and expenses associated with finalizing the mortgage loan and transferring ownership of the property. These costs may include appraisal fees, title insurance, attorney fees, and other charges. Buyers are typically responsible for these costs.
- Escrow: Escrow refers to a designated account where funds are held by a third party (escrow agent) until all the conditions of a real estate transaction are met. It helps ensure that all parties involved in the transaction fulfill their obligations.
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