Mortgages might be the single most important aspect of buying a home. In the simplest terms, a mortgage is a loan given by banks to pay for a home and the property the home is located on. In exchange for the loan, the banks use the house and property as collateral, which means that lenders have the ability to seize the property and the house if mortgage payments aren't received.
While it may seem like a simple concept to grasp, mortgages actually have complex characteristics that can cause confusion for first-time home buyers. The following is a glossary of terms that will help pave the way to understanding mortgages:
Interest: money charged by lenders for homeowners to take out a loan. Interest rates are generally determined by the amount of money loaned combined with the current state of the economy. Loans come with either fixed or adjustable interest rates. Fixed rates remain uniform throughout the entire term and adjustable rates fluctuate with the economy.
Principal: the actual amount of the loan
Term: the amount of time it will take for the loan to be repaid in full. Generally, mortgages are either 15-year or 30-year loans.
Amortization: the repayment of loans broken down into equal monthly payments. A loan's total payments are the sum of the principal and the interest, which is then divided into equal payments over the term. This process is known as amortization.
Foreclosure: a term that all homeowner's fear, foreclosure is the process of the lender gaining ownership of the home due to missed payments.
Point: a way to measure percentages of a loan. One point is equal one percent of the principal. For example, one point of a $1 million loan would be $10,000.
These terms represent the roots of all mortgages and should be understood in full before delving deeper into the bewildering world of mortgages. First time home buyers should always contact a mortgage consultant for more information about home loans before signing any papers.