Mortgage Loan

 

If you’re planning on buying a piece of real estate, say a house and don’t have enough cash to cover the whole purchase price, you’re going to have to go to a lender, say a bank, and take out a mortgage loan. If the loan is granted to you, you will have to sign a mortgage loan agreement. The process of obtaining a mortgage loan can be nerve-wracking and the stakes are high as well. It is of utmost importance to be well versed in mortgage jargon and be adequately informed before signing anything. Here are a few terms that you should know about and are most likely to encounter:

What is a mortgage loan

A mortgage loan or simply mortgage is a loan obtained by a borrower to finance the acquisition of real estate property. The borrower mortgages the property with the lender in the form of a lien and the property becomes the collateral for the mortgage loan. A collateral is the security that ensures the loan will be paid in full. The lien gives the lender or mortgagee temporary ownership of the property until the mortgage loan is paid in full. In the event the borrower defaults or fails to pay the loan, the property is turned over by a legal process to the lender. Mortgage loans may be obtained from banks and independent mortgage brokers.

Amortization of mortgage loan

Amortization Period of the mortgage loan? The amortization period is the length of time you commit to pay off the entire mortgage loan. Amortization periods are commonly set at 15-30 years and some are even longer but not too many lenders off them. Longer amortization periods reduce the monthly payments but you would pay interest at higher rates over the whole period.

Term of mortgage loan

Mortgage Term. The mortgage term is a fixed period of time that you commit to the mortgage rate and other conditions set by the lender. This term is commonly set anywhere from 1 to 5 years but may take up to 10 years. When the mortgage term expires, you have to renew the term for the remaining principal of the mortgage loan at the new mortgage rates prevailing at the time.

Closed Mortgage. A closed mortgage will not allow you to prepay or renegotiate the terms until the maturity of the mortgage loan. You will be penalized for prepaying the loan.

Open Mortgage. An open mortgage allows prepayment of the mortgage loan without any additional charges.

Adjustable Rates Mortgage: This is a mortgage loan where the mortgage rate fluctuates over the term depending on market conditions. It can be advantageous when interest rates fall during the payment period.

Fixed Rate Mortgage: This is the kind of mortgage loan where the interest rate is fixed and unchanged until the end of the mortgage term.

Foreclosure: This is the legal process by which full ownership of the property is transferred to the lender when the borrower defaults on the payment of the mortgage loan.

Taking out a mortgage loan could well mean you will be making monthly payments for as much as 30 years. That is a huge accountability to carry for a long time. It is better to spend a little time and effort beforehand to consider the type of mortgage loan that you will be able to pay off in what could be the rest of your life.

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