What exactly is a mortgage?

Mortgage  A loan to finance the purchase of real estate. Loan  A sum of money given to an individual with intent to repay at a future date with agreed interest.

Is a mortgage a loan?  Contrary to what you may think, a mortgage is not a loan. A mortgage is actually a lien on the property which secures the loan. In this day and age, the terms mortgage and loan have come to be used interchangeably. Of course they are related but, in fact, they are indeed two different things.

Now that you are familiar with what a mortgage is……………… Perhaps you’ve heard of the terms mortgagor and mortgagee. But do you know which is which?  Mortgagor refers to the party that borrows money.  Mortgagee refers to the party which receives the lien as security, the lender.

Let’s take a closer look at the components of a mortgage loan. A mortgage loan has three components, without which the loan would not be viable (financially sustainable.) Each component must have a value, or the loan cannot be computed. These three components are: TThe size TThe interest rate, and TThe term

The Size……….  The size of the loan simply refers to its face value; in other words, the amount of money that you wish to borrow.

The Term………………  The loan’s term refers to how long it will take to fully amortize, or pay off, the loan. It may be expressed in months or years.

The Interest Rate……………..  The interest rate is the regular and recurring fee that the lender charges for the borrowed funds. It’s usually expressed as a percentage of the loan, and it is calculated on an annual basis. It has a direct bearing on the size of your monthly payment. The lower the interest rate, the lower your monthly payment will be; the higher the rate, the higher your payment.

Conventional Fixed Rate-  Fixed interest rate (stays the same over the life of the loan)  15, 20, and 30 year terms  Fixed monthly payments  Stable  Planning to stay in home for 10+ years  Great if you don’t expect income increase

Adjustable Rate Mortgage-  Interest rate varies upon economy/market  Lower interest rate than fixed rates up front  Rate cap (1-2% / year or 5% life cap)  Max buying power (lower rate helps you buy a better house)  Don’t plan to live in home long  Expect income to increase

Convertible ARM-  Can change to a fixed rate  Interest rate % lower than fixed rate  Fee to convert to fixed usually $500

Interest Only Mortgage  Initially required to make interest payments only.  After initial period changes to include both interest and principle.  Investment or if income is expected to increase.  Could result in Negative Amortization- principle goes up instead of down.

FHA Loan A government loan that is insured by the Federal Housing Administration (FHA). FHA loans have been particularly helpful for individuals who typically otherwise would not have been able to secure a loan from another source, due to low income or high risk. LLow payments LLow interest rate LLow or no down payment

VA Loan Veterans Administration (VA) is an agency of the federal government which provides a variety of services for United States veterans. One of the main services it provides is helping veterans and their families find and purchase housing.  Lower interest rate on their mortgage payments.  They won't have to provide a down payment.

Home Equity Loans  2 nd Mortgage  Based on difference between the current market value of home and what you owe Use money for :  Home improvements  Business  Education