Understanding The Basics of a Mortgage

Posted by Nick Niesen on October 29th, 2010

A mortgage is nothing but a loan secured against the property that is your home, here secured means if you are not prompt with your loan payments, the lender has the rights to sell you home to take back his amount he has lent to you. A mortgage is nothing but a piece of paper, but the paper is so important that any individual see during his financial life.

Anyone would prefer to go for a secured mortgage for the home and it is not so tough today as the mortgage is available for any kind of financial requirement, but choosing the right one is important and it deserves a little knowledge.

Its huge amount required for mortgage and to settle this huge amount you require long time. The most famous mortgage that is a fixed mortgage available with the option of repayment in 30 years, there are 40 years mortgage, 20 years mortgage and 15 years mortgage available and are famous too.

When you purchase a home, you need to reserve your money for insurance, taxes in an escrow account, so when you get the mortgage, your payment would be divided into 4 categories that is called PITI (Principal, Interest, Taxes and Insurance)

Principal is the loan amount balance and that gets paid during the years of mortgage you have chosen. Interest is the amount you pay for the loan amount, in amortized loans the entire repayment of loan amount goes for the interest in the early years and in the later years repayment goes for the principal loan amount. Taxes is something you owe annually to the government for water treatment, schools and to the cop on the corner and at this time the escrow account helps you to make the payment in monthly installments. Insurance is very important thing as you can?t imagine losing your home for any kind of disaster, and this insurance is being paid by escrow account in 12 installments.

Fixed rate mortgage are static, when you are planned to stay in the same place for a long time the fixed rate mortgage is the best as there would be no change in monthly payments for the loan amount you have gone for 15 years or 30 years of mortgage.

Incase you have no intention to stay in the same home for long years you can opt for Adjustable rate mortgage that is ARM. This adjustable rate mortgage has variable rate of interest and the payment varies annually or anytime whenever there is change in the interest rate. If the interest rate goes up your mortgage payment goes up.

Adjustable Rate Mortgages are being called as ?Interest rate risk? unlike fixed rate mortgages where you are very confident about how much you are making the payment for the principal, interest, taxes and insurance every month through out your loan repayment years.