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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.
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