As you begin the process of buying a home, It Is very Important to talk to your lender and get a pre approval amount for your New Home. This process is necessary and you’ll probably come across a number of new terms and phrases. Here is a list to help you better understand some of the Terms you’re most likely to encounter.
Mortgage. A loan for the purposes of financing a home purchase where your home functions as security for repayment of the loan.
Amortization period. The length of time it takes to pay off the entire amount of your mortgage.
Down payment. The amount of your own money that you use to buy your home – it’s often expressed as a percentage of the purchase price.
Interest rate. The rate of return the lender receives for letting you use the mortgage money for a specified term. The interest rate is usually expressed as an annual percentage rate.
Principal. The amount of the loan or mortgage you owe to your lender at any specified time, not including interest.
Term. The length of time during which your mortgage agreement is effective. The term can be closed or open.
Mortgage default insurance. This insurance is mandatory for borrowers with a down payment of less than 20%. Mortgage insurance gets automatically added to your mortgage amount if required.
Prepayment charges. Money you need to pay your lender to compensate for the prepayment of a closed mortgage in part or in full before the end of your term.
Types of Mortgages:
Variable rate mortgage. Where the interest rate changes with your lender’s prime rate. Your payment stays fixed for the term, so if interest rates go up, your interest cost will too. But if interest rates go down, so will your interest cost.
Fixed rate mortgage. Where the interest rate is set for the length of the mortgage term. Fixed rates offer security so even if interest rates in general rise, your mortgage rate is locked in for the term.
Closed mortgage is a mortgage agreement that has restrictions on refinancing or prepaying the outstanding amount before the end of the term. Closed mortgages are a better choice if you don’t plan to move in the short term.
Open mortgages can be repaid either in part or in full at any time, without prepayment charges. Interest rates for open mortgages are generally higher than for closed mortgage because of the added prepayment flexibility.