QandAs: Loans

What are the main parts of a Mortgage?

Answer:
Before you purchase your first home it's likely

you are a bit clueless on the whole process. You probably believe you find a home, it's priced accordingly and you buy it. You then go to the bank and ask them to loan you the amount to pay for the home. You then pay off that loan in monthly installments until it's paid off at which time you then own 100% of your home. This is true to some extent but it's good to know all the parts of a Mortgage loan and perhaps the next time you purchase a home your versed enough in Mortgage 101 that you can save yourself some money.

The main part of a Mortgage Loan that you should be concerned about is the interest rate or . A Mortgage interest rate is calculated by each lender or creditor. They calculate this rate based on the prime rate index which is adjusted by the Federal Reserve System. An interest rate is the rate of interest you will pay on your debt. So if your home is going to cost $150,000 and you're not putting a down payment and the interest rate is locked-in at 6.30% then you will pay 6.30% interest on the $150,000 you borrowed. Interest rates fluctuate depending on the time and the product you choose. Typically, ARMs and Interest Only mortgage loans have lower interest rates because it is a less risky loan for the creditor to issue. The interest rate of your mortgage ultimately decides how much total you are paying.

Points kind of go along with the interest rate. Points are prepaid interest on your home loan. You're basically paying some of the interest up front. One point is equal to one percent of the mortgage loan and each point you pay for gives you one percent of pre-paid interest on the total home loan. This limits the risk of the lender so often times paying for points will lower your mortgage rate.

The term of your Mortgage Loan is another major part of a Mortgage. The term is the amount of time designated to payoff the mortgage loan. Conventional fixed rate mortgages are often 30 year or 15 year terms. The shorter the term the lower the interest rate. The mortgage lender is accepting a less risky investment when you assume a shorter term therefore the interest rates reflect this.

The type of mortgage product determines your interest rates as well as your term. An adjustable rate mortgage or interest only mortgage typically have shorter terms and lower interest rates associated. They are a less risky investment for the lender so the rates are much lower.

PMI or Private Mortgage Insurance is insurance that you pay to the creditor or home loan lender when you get your home loan. It is insurance for the lender in case you are unable to cover your mortgage payments. There are ways to remove PMI from your mortgage by taking out an additional mortgage or an 80/20 Mortgage. This is where 80% of the loan amount is put on one mortgage and the remaining 20% is put on an additional mortgage. So now you have two mortgages, which is very common, it removes PMI as your additional mortgage provides coverage in case you default on your loan.

There are also fees associated with a Mortgage loan . These fees can include closing costs, and mortgage lender fees such as processing fees, application fees etc. Be sure to ask your Mortgage loan officer to explain in detail what the additional fees are. Often times, some of the fees can be waived or negotiated where the seller of the property will cover some or all of these costs.

A mortgage or home loan is a complex vehicle and don't expect to know everything about them for your first home purchase. I'm confident that if you read enough and educate yourself then you will feel more comfortable come your next home.