Understanding Mortgage Terms
In order to get the best deal on your home mortgage loan, it is a good idea to understand certain terms that are specific to the real estate and financial industry. The following are the common terms you"re going to hear when applying for your first mortgage.
Length of the Loan / mortgage term
Loan term is a period of time you have to pay back the money you borrowed from the mortgage lender. A mortgage term can range anywhere from six months loan to 30 years.
Points
A point refers to interest costs paid to the mortgage lender in order to reduce the interest rate. Points are paid one time and are generally equal to 1% of the loan principal. For example, if you were taking out a 100,000 mortgage and wanted lower interest rates, you might have to pay anywhere from 1-3 points (1,000 3,000 dollars) to get the rate. It is important to note that some mortgage lenders will advertise very low interest rates, and only if you read the print carefully, you will find out that you have to pay points in order to get the rates.
It"s not always a good idea to pay one-time points in order to get a lower interest rate. In some cases points are not even needed in a deal and are just a bonus for the lender. Always do the math for each mortgage option to find out what will cost you the least amount of money.
Interest Rate
Interest rate is a yearly rate that is charged on the principal of the loan amount provided by the lender. It is a percentage of the principal loan amount. Interest rates can be very different depending on the type and terms of a mortgage. The interest rate has a base percentage dictated by a national index and then percentages are added to this according to the amount of risk the lender is taking by giving you the money to finance the house. With mortgage loan, all of the interest is front loaded, meaning that for the first few years, every payment that you will make go mostly toward the interest.
Loan to value ratio
Loan to value ratio is a ratio that used by your mortgage lender to determine how much they can loan you. The ratio is found by dividing the loan amount by the market value of the home in consideration.
Most mortgage lenders will loan up to 80 percent of the market value of a home. However, there are lenders who will loan more than 80 percent of the market value in exchange for a higher interest rate.
Debt Service Coverage
Debt service coverage is a ratio used by the lender to see if you are capable to pay back the mortgage loan in addition to your other current debt. The ratio is determined by dividing your net income by debt. Most lenders look for debt service coverage ratios of 1.2.
These terms are specific to mortgage characteristic. Do some research or read some more to become familiar with the lending terms you need to know. There are also many mortgage companies online that can help you find direct mortgage lenders.
Length of the Loan / mortgage term
Loan term is a period of time you have to pay back the money you borrowed from the mortgage lender. A mortgage term can range anywhere from six months loan to 30 years.
Points
A point refers to interest costs paid to the mortgage lender in order to reduce the interest rate. Points are paid one time and are generally equal to 1% of the loan principal. For example, if you were taking out a 100,000 mortgage and wanted lower interest rates, you might have to pay anywhere from 1-3 points (1,000 3,000 dollars) to get the rate. It is important to note that some mortgage lenders will advertise very low interest rates, and only if you read the print carefully, you will find out that you have to pay points in order to get the rates.
It"s not always a good idea to pay one-time points in order to get a lower interest rate. In some cases points are not even needed in a deal and are just a bonus for the lender. Always do the math for each mortgage option to find out what will cost you the least amount of money.
Interest Rate
Interest rate is a yearly rate that is charged on the principal of the loan amount provided by the lender. It is a percentage of the principal loan amount. Interest rates can be very different depending on the type and terms of a mortgage. The interest rate has a base percentage dictated by a national index and then percentages are added to this according to the amount of risk the lender is taking by giving you the money to finance the house. With mortgage loan, all of the interest is front loaded, meaning that for the first few years, every payment that you will make go mostly toward the interest.
Loan to value ratio
Loan to value ratio is a ratio that used by your mortgage lender to determine how much they can loan you. The ratio is found by dividing the loan amount by the market value of the home in consideration.
Most mortgage lenders will loan up to 80 percent of the market value of a home. However, there are lenders who will loan more than 80 percent of the market value in exchange for a higher interest rate.
Debt Service Coverage
Debt service coverage is a ratio used by the lender to see if you are capable to pay back the mortgage loan in addition to your other current debt. The ratio is determined by dividing your net income by debt. Most lenders look for debt service coverage ratios of 1.2.
These terms are specific to mortgage characteristic. Do some research or read some more to become familiar with the lending terms you need to know. There are also many mortgage companies online that can help you find direct mortgage lenders.
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