Mortgage Terms Defined

Before you begin searching for a home, it is important not to waste your or your realtor's time searching for homes you can't afford!

The first step in buying a new home should be to take a look at what you can afford and how you are going to pay for it. If you're like the majority of home buyers, you will have to finance your purchase with a mortgage loan. So what exactly 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. Below is a quick overview of some of the most common terms and aspects of a mortgage that you should understand.

The principal is the amount of the loan that is actually borrowed.

The interest is the amount the lender charges for the use of funds borrowed. Interest rates vary according to a number of factors including terms and conditions of the mortgage and the borrower's credit history. Payments are usually comprised of both principal and interest.

The amortization period is the number of years that it will take to repay the entire mortgage loan in full. A longer amortization period will result in lower payments but will take longer to pay off the loan which means you will pay more in interest. Amortizations typically range from 15-30 years.

The term is the length of time for which a mortgage agreement exists between you and your lender. A longer term means you will keep the interest rate agreed upon for a longer length of time. Rates and therefore payments vary with the length of the term. Terms usually range from 1-10 years with a five-year term being the most common. Generally, a longer term, because of the added security, will be at a higher rate than a shorter term.

The maturity date marks the end of the term, when you can repay the balance of the principal or renegotiate the mortgage at interest rates in effect at that time. If you choose to repay or renegotiate the mortgage before this time, penalties may be charged. Once your mortgage matures you are free to renew with your current lender or shop around to other lenders for the best rate.

The payment schedule is the frequency at which you will make your mortgage payments. These can occur monthly, semi-monthly (twice a month), bi-weekly (every other week) or weekly. Generally, more frequent payments result in lower interest costs over the life of your mortgage as more principal will be paid down per year.

Do you still have a question about starting a mortgage or what mortgages entail? Call or email us anytime! We would be happy to sit down with you to review the process.