A mortgage is a loan that helps you finance the purchase of a home. When you take out a mortgage, you agree to repay the loan over some time, usually 15 or 30 years. The terms of your mortgage will determine how much you’ll pay each month in principal and interest. Your mortgage terms can also affect the total amount of interest you’ll pay over the life of the loan.
You can take the assistance of property lawyers in London before signing any deals to help you get the best rates on interest.
You should be aware of a few key terms when taking out a mortgage. These include:
Table of Contents
Principal
The principal is the amount you borrowed to purchase your home. Each month, a portion of your payment will go towards repaying the principal. The remaining balance on your mortgage is called the loan balance.
Interest
Interest is the fee that lenders charge for borrowing money. Your interest rate will determine how much interest you’ll pay each month. The higher your interest rate, the more interest you’ll pay each month.
Term
The term is the length of time you have to repay your mortgage. The most common terms are 15 and 30 years. A shorter term will result in a higher monthly payment, but you’ll pay less interest over the life of the loan. A longer-term will result in a lower monthly payment, but you’ll pay more interest over the life of the loan.
Fixed-rate or adjustable-rate
A fixed-rate mortgage has an interest rate that stays the same for the entire term of the loan. An adjustable-rate mortgage (ARM) has an interest rate that can change over time.
ARMs usually start with a lower interest rate than fixed-rate mortgages, but the rate can increase over time. The amount of interest you pay each month will depend on the interest rate at the time.
Amortization
This is the process of spreading out your loan payments over the life of the loan. Your monthly mortgage payment will stay the same for the first few years, and then it will gradually increase as you pay down more of the principal balance.
Pre-Qualification
This is when a lender gives you an estimate of how much they’re willing to lend you based on information like your income, debts, and credit score. Getting pre-qualified for a mortgage can give you a good idea of how much home you can afford.
Pre-Approval
This is when a lender gives you a letter stating that they’re willing to lend you a specific amount of money for your home purchase. Getting pre-approved for a mortgage puts you in a stronger negotiating position with sellers because they’ll know that you’re serious about buying their home.
Prepayment Penalty
A prepayment penalty is a fee that some lenders charge if you pay off your loan early. Before agreeing to a mortgage, be sure to ask if there is a prepayment penalty and what the fee will be if you do choose to pay off your loan early.
Conclusion
Before you commit to a mortgage, it’s important to understand all of the terms so that there are no surprises down the road. The term is how long you have to repay the loan, and the interest rate is what you’ll pay each year in interest on top of your monthly payments. It’s also important to know whether your mortgage has a fixed or adjustable interest rate so that you can plan accordingly. If you have any questions about any of these terms, be sure to ask your lender before signing on the dotted line!