What is a Mortgage?
For most people, buying a home is the largest financial move they will make in their lives. Since most people don’t have enough cash on hand to purchase their home in full, a mortgage loan provides the money needed to finance the purchase.
The recommended ratio for a mortgage is usually a 20% down payment, with 80% of the purchase price financed. Once in place, the loan is secured against the property you buy and is usually paid monthly—although alternate payment plans are often available.
Your mortgage payment is made up of four parts
Every mortgage is comprised of four parts: Principal, Interest, Taxes and Mortgage Insurance. While a mortgage agent can help you through the entire mortgage application, it’s beneficial for you to have a basic understanding of these four parts.
1. Principal
This is the amount you are borrowing to purchase your property. For example, if you purchased a home for $1 million, and made a $200,000 deposit, your principal will be $800,000.
2. Interest
As with any loan, there are costs associated with borrowing money. Interest is the cost of the mortgage that you pay to your lender. Interest payments are determined by your interest rate.
3. Taxes
Often, property taxes are rolled into a mortgage payment. Property taxes are calculated by your municipal government and are based on the assessed value of your property.
4. Mortgage Insurance
If your down payment is under 20% when you purchase your property, your lender will require that a mortgage insurance policy is added to your mortgage. This insurance protects the lender in the event of a mortgage default.
Types of mortgages
There are two basic types of mortgages: Open and closed. A mortgage agent can help you determine which is best for your mortgage needs, but here are the basics.
Open mortgage
An open-term mortgage is a mortgage that can be repaid fully, or partially at any time, without penalty. These types of mortgages can also be converted to different terms without penalty. Keep in mind that because of this added flexibility, they usually have higher interest rates than closed mortgages.
Closed mortgage
A closed-term mortgage is a mortgage for people with no plans to pay off their mortgage in the short term. Closed-term rates are usually lower than open-term rates and often come with fixed or variable options.
Mortgage note & prepayment charges
When your sale closes and your mortgage is put in place, you will sign a mortgage note. This legal document indicates your promise to repay the mortgage balance, interests and any other costs associated with your mortgage.
You may also have the option of making prepayment charges, which may add some flexibility to your payment amounts, or ability to accelerate payments.