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Useful Mortgage Information
What a Mortgage Payment Consists of
1) Principal: The repayment of the original amount
borrowed on a monthly basis.
2) Interest: The cost of borrowing the principal amount, repaid on a
monthly basis.
3) Taxes: Real Estate taxes paid to a local government agency.
4) Insurance: Homeowners insurance on the home. Also any mortgage
insurance, which is paid to protect the mortgage company.
The total of these items is known as the PITI (Principal/Interest/Taxes/Insurance)
payment.
Types of Mortgages
Conventional: This is a mortgage that is for 75% or
less of the value of a home and would require a minimum of 25% down payment.
This higher amount of down payment will generally equate to
a lower interest rate.
High-Ratio: Those mortgages with less than 25% down (sometimes as low as
5%) are considered to be high-ratio mortgages.
Amortization
This is the number of years that the monthly payments are
based on--as opposed to the term, which is the period that the parameters of the
loan (such as interest rate) are structured. Amortization will usually be in 15,
20 or 25 year periods. The longer the period of amortization the lower the
payment but the amount of interest paid will be larger.
Term
The term is the length of time that the mortgage
(including the interest rate) is in effect. Terms are commonly for periods from
6 months up to 10 years, at which time the loan would need to be paid off or
renewed with the interest rate adjusted to then current market conditions. In
general, the shorter the term, the lower the interest rate and the longer the
term, the higher the interest rate.
Open and Closed Mortgages
With an open mortgage, the loan can be repaid at
any time without penalty. With closed mortgages, there are frequently
penalties for paying back the mortgage, either in part or full, before the end
of the term.
Fixed and Variable Rates
In a fixed rate loan, the interest
rate remains constant through the entire term. With a variable rate mortgage,
the interest rate will adjust on a monthly basis, causing the payment to either
rise or fall
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