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Mortgage Loans

The mortgage is a legal document that secures the note and gives the lender a legal claim against your house if you default on the note's terms. In effect, you have possession of the property, but the lender has an ownership interest (called an "encumbrance") until the loan has been fully repaid. The lender agrees to hold the title or deed to your property (or in some states, to hold a lien on your title or deed) until you have paid back your loan plus interest.

Mortgage amount and term
The mortgage amount is the amount of money you borrow from a lender to pay for your house. The term is the number of years over which you can pay back the amount you borrow. The length of your mortgage repayment period will directly affect your monthly mortgage payments. For the same mortgage principal amount, you will find that the shorter your repayment period is, the higher your monthly payments will be, but the total interest you pay over the life of the loan will be less. On the other hand, the longer your repayment period is, the lower your monthly payments will be, but the total interest you pay over the life of the loan will be more. The most popular mortgage term is 30 years. By extending payment over 30 years, you keep your monthly housing costs low. If you can afford higher monthly payments, you can select a mortgage term that is shorter: there are 20-year, 15-year, and even 10-year fixed-rate mortgages available from most mortgage lenders.

Amortization
During the term of your loan, you will pay back your mortgage by making regular monthly payments of principal and interest. In the early years of your loan, most of the money you pay will be for the interest you owe. Toward the end of the term of your loan, you will be paying primarily principal. This type of repayment method is called amortization.

Fixed interest rate
Some mortgages have an interest rate that is fixed for the entire term of the loan. One advantage of a fixed-rate loan is that you know your interest rate will never change over the term of your loan.

Adjustable interest rate
An adjustable-rate mortgage (called an ARM) has an interest rate that varies during the life of the loan. The interest rate with an ARM may increase or decrease based on market interest rates. Consequently, your mortgage payments may go up or down.

Down payment
The down payment is the part of the purchase price that the buyer pays in cash and does not finance with a mortgage. The larger your down payment, the less you will need to borrow. The less you need to borrow, the smaller your mortgage payments will be. Lenders often view mortgages with larger down payments as more secure because you have more of your own money invested in the property. However, you may have as little as 3 percent to 5 percent of the purchase price for a down payment. Lower down payments help many people afford homes of their own sooner.

Closing costs
The closing, also known in some areas as the settlement, is the final step -- the act of transferring ownership of the home to you. The closing usually takes place at a financial institution, like a bank or savings and loan, and is designed to ensure that the property is all set to be transferred to you. Each state has its own rules as to what costs must be paid at the closing. Common items to be paid at the closing are: transfer taxes and recordation taxes; title insurance; the site survey fee; loan discount points; attorney fees; and various fees for preparing the legal documents. When talking about closing costs, rather than discussing all of these fees individually, closing costs are talked about as a percentage of the sales price or the loan amount. Although you can try to get the seller to pay some part of the fees, closing costs generally range from 3 percent to 6 percent of the sale price of your home.

Discount points
Points (also called "discount points") are a type of fee that you pay to your lender. Simply put, a point is equal to 1 percent of the loan amount. One point on a $100,000 loan is $1,000; on a $200,000 loan, it is $2,000. Discount points represent extra money you can pay to the lender at closing in exchange for a lower interest rate on your loan. For each point you pay for a 30-year loan, your interest rate is generally reduced by about 1/8th (or .125) of a percentage point. So, if the current interest rate on a 30-year mortgage is 8.5 percent, paying 1 point means you could get that mortgage for an interest rate of 8.375 percent. For example, you are shopping for a 30-year mortgage loan. A lender quotes you an interest rate for a 30-year, $100,000 mortgage at 8.5 percent. You can choose not to pay any discount points at closing and pay 8.5 percent interest. If you are more interested in paying less interest, you can ask the lender to quote you interest rates with your paying 1, 2, or 3 discount points. Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points.