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David Stroup

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Securing the right type and terms of your mortgage loan are just as important as your purchase.

The modern mortgage market offers a variety of mortgage loans catering to the needs of homebuyers. The titles and details of these plans can become confusing, especially as new types continuously evolve. Look to your real estate professional for assistance.

 

Basic Principles of all Mortgage Loans

  • The home is used as security to back up the loan. A lender can force the sale of the home if the borrower defaults, i.e., failure to make scheduled payments.
  • The larger the loan compared to the value of the home, the riskier for the lender and, often, the more expensive the loan.
  • Interest earned by the lender is equal to the periodic interest rate multiplied by the outstanding principle balance of the loan. The periodic interest rate is the annual interest rate divided by the number of payments in the year (usually one per month).
  • The required payment is typically a bit larger than the interest due so that some of the loan principal is repaid with each payment. This process is called Amortization.

 

Basic Features of all Mortgage Loans

  • Fixed payment and fixed interest rate – fixed rate mortgages
  • Fixed rate but variable payment – graduated payment mortgages
  • Variable rate and variable payment – adjustable rate mortgages

 

Some loans appear to have more favorable terms. For example, shorter-term loans often have slightly lower interest rates. However, the monthly payment for the same amount of principal may be higher because of the shorter term. Variable rate loans usually have much lower interest rates to compensate for the risk the borrower accepts if interest rates will go up in the future.

 

 

 

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