Mortgage-Related Terms
- The mortgage is a home loan that lasts for up to 30 years.Hipoteca 2 image by Nuka from Fotolia.com
Mortgage is just a fancy legal term for a long-term loan. As with most other legally binding contracts, mortgages come with a dizzying array of terms and jargon that can quickly become confusing to the lay person. Although a number of the terms related to mortgages relate to the different types of mortgages available, all of these long-term loans operate essentially the same way in that the mortgage holder is legally bound to make regular payments for a specified period of time. - Fixed-rate mortgage is a term that applies to and describes a home loan in which the payments are spread out over a specific period of time. In most cases, a fixed-rate mortgage applies to a loan that will take either 15 or 30 years to pay off. The interest rate is locked in at the beginning of the loan and remains constant unless the buyer decides to renegotiate to get a lower interest rate.
- Adjustable-rate mortgages are those in which the rate of interest fluctuates over time. The actual interest rate applied to this type of mortgage is dependent on current market conditions and the effects of inflation. In most cases, a cap is placed on an adjustable rate mortgage to protect the buyer from an abnormal upward spike in interest rates and to protect the lender from an unexpectedly sharp lowering of interest rates.
- A balloon payment refers to a large payment required upon termination of the mortgage loan. Until the balloon payment comes due at the end of the loan’s tenure, a series of equal payments are made. Aside from the huge payment that eventually comes due, the biggest downside to this type of mortgage is that the regular payments tend to cover only the interest and, according to “Everybody’s Money Book,” this means no equity has been built over time.
- Points are usually required for obtaining a mortgage. In some cases you may be able to negotiate a lower interest rate by agreeing to pay more points up front. A point is equal to 1 percent of the total amount that you are borrowing with your mortgage loan.
- In some cases, the buyer may be required to buy mortgage insurance before a loan will be approved. Generally, mortgage insurance is only required of those making a down payment that is less than 20 percent of the total purchase amount. Mortgage insurance can actually be seen as a form of life insurance that is set up to guarantee the lender will receive the remainder of the mortgage if the borrower dies.
- Escrow is the term used to describe the reserve fund associated with a mortgage loan that holds sufficient funds to cover the cost of paying property taxes and homeowner’s insurance premiums. The escrow account is supposed to be reviewed by the lender every year and adjusted to account for either a shortfall that won’t cover those expenses or a surplus. In either case, the monthly payment amount may be slightly lowered or raised for the next year.
