May 24, 2019 | Posted by: Jatinderbir Singh Bajwa
If you are taking a step towards home ownership then, like a vast majority of people, you will be looking for a mortgage. In the simplest terms, a mortgage is a type of loan used for purchasing some kind of property, whether that be a residential home, a commercial property, or a plot of land. When you take out a mortgage, the property that you used the mortgage to purchase becomes the security on the loan. If you default on the loan, then your mortgagor seizes the home.
Payments on a loan include two things, payment on the principal and payment on the interest. Property tax, insurance and other such charges can also be included in your payments. As you pay off your mortgage, the majority of the money goes towards the interest payments, with a smaller amount going towards paying the principal and other fees. The more that you pay down your mortgage, the more you increase your equity, while paying the interest on the loan does not add to your capital at all. Equity is considered every part of the property that is paid for, both from the original downpayment and from any mortgage payments that go towards the principal.
When you have a mortgage, the best thing that you can do to save money in the long term is to try to pay off your mortgage as quickly as possible, always remembering that when you pay the principal, you are paying yourself by adding to your equity. Make sure that when you are negotiating your mortgage that you can make extra payments and that these are applied directly to the principal. The faster you pay off the principal, the less interest you have to pay. You can end up saving tens of thousands of dollars by doing this.
Once you have a mortgage, there are two terms that you will need to understand and be able to differentiate. Mortgage term and amortization. The mortgage term is the amount of time that your current mortgage agreement and rate of interest apply to. Amortization is the length of time that you will be most likely paying off the entirety of your mortgage. While your mortgage term may be five years long, your amortization period may be 25 years. Your amortization period has a huge impact on your monthly payments. For instance, if you owe $150,000 and have an interest rate of 5.25% if your amortization period is 25 years you will pay $894 a month, while if your amortization period is 20 years you will pay $1,006 a month.
There are also two types of mortgages, and knowing the difference between them is important. First, there are open mortgages, where you can pay extra on at any time and even pay it off in full without prepayment charges. Second, there are closed mortgages, where you would have to pay a prepayment fee if you want to make extra payments. The positive to a closed mortgage, however, is that you have a lower interest rate.