Sometimes, when one addresses a specialist, the person who is used to his or her profession's jargon does not note that the client ignores many terms which makes it very difficult to understand any type of explanation of a product if some definitions are not clarified before.
Following are some basic concepts regarding secured loans that will help those venturing in the financial world for the first time.
Mortgage or Home Loan Concepts Mortgage loans have a jargon of their own and also share concepts with other loan types.
That's why we will start with this loan type.
The PRINCIPAL is the amount of debt that you owe to the lender.
This amount does not include the INTERESTS (cost of the loan) that are generated over time when the INTEREST RATE (which is a percentage that indicates the price of the transaction) is applied to the principal.
A FIXED RATE is an interest percentage that does not change over time and remains the same throughout the whole life of the loan whereas a VARIABLE RATE is an interest percentage that changes according to market variations thus increasing or reducing the amount of the monthly payments.
The fixed rate provides more predictability while a variable rate is always lower than the fixed rate if considered at the same time.
Usually a loan transaction has two parts: the lender and the borrower.
When it comes to mortgage loans, the lender is called the MORTGAGEE and the borrower is referred to as the MORTGAGOR.
The property used as collateral or being bought with a mortgage loan has a certain value that needs to be known in order to process a loan of this kind.
In order to do this, a realtor specialist will calculate this value based on many factors known due to his profession.
This process is called APPRAISAL and implies an approximate calculation of the property's market value.
The lack of payment of several mortgage loan installments implies a DEFAULT.
The consequences of a default if the repayment is not restarted are very serious.
The gravest one is FORECLOSURE which is a legal process by which the property guaranteeing the loan is sold compulsory in order for the lender to collect the money owed from the amount produced by the transaction.
Refinancing and Home Equity REFINANCING is the process by which a previous mortgage loan is replaced with a new one.
This can be done either to save money by obtaining a lower interest rate or by reducing the length of the loan or to make the loan more affordable by extending the repayment program.
When refinancing a home loan one needs to check that PREPAYMENT PENALTY FEES (if present) do not turn refinancing the home loan into an expensive decision.
These fees are often charged by lenders that want to make sure that the borrower remains paying the loan installments if you repay the loan sooner than agreed.
HOME EQUITY is the difference between the amount of debt guaranteed by a property and the market value of the asset at any given time.
The available equity on a property lets the owner obtain further financing by securing an additional loan with the equity.
These loans are known as HOME EQUITY LOANS and also as SECOND MORTGAGES.