How to Understand Mortgage Contracts in Few Easy Steps
Once you apply for a mortgage loan it is important that you know how to 'read' a mortgage contract and all the other documents that may emerge with this contract. There are a few basic things that you have to be clear on and before you go to the lender to close the mortgage deal, you are presented with the paperwork that you can take at home and review you at your own pace.
If it helps, you can as well resort to the assistance of a friend who is more knowledgeable on these matters and can explain better about how some terms work for your loan. In the meanwhile you should pay attention to the glossary of terms that accompanies a mortgage contract and know how to 'translate' the contract into plain English, sort of speak.
The key terms are as follows:
- Principal amount - this one signifies the total amount you are planning to borrow from the lender.
- Term - represents the duration of time throughout which you are supposed to repay the mortgage. So the mortgage contract can be done over a period of 10, 15, or more years.
- Amortization of the loan - entails the process of paying off the loan and there is 'negative amortization' representing an increased balance of the principal due to delayed or missed repayments.
- Fixed rate - is the rate that you pay off the mortgage with remaining stable throughout the entire period of loan repayment. This is the type of rate that many borrowers will favor due to its stability.
- Adjustable rate - represents a rate that can be adjusted and not many borrowers are willing to choose this one. But there are a few loopholes to benefit from. For instance, you can be offered with a lower rate over a period of 10 years before the rate is adjusted to another level. This can enable you save good money in interest rates if you choose to go with ARM - Adjustable rate Mortgage.
- Balloon payment - represents a payment that comes in a large amount and it is done at the end of the mortgage term.
- Good faith estimate - are another terms you may come across with a mortgage contract. This means that your mortgage application process entails some fees that need to be paid within 3 days of the application submission.
- Truth in Lending Law - relates to the lender's disclosure of the real APR (Annual Percentage Rate), total costs and term of loan.
- Prepayment penalties - are other terms you need to understand together with a mortgage contract. These penalties are applied each time you want to pay a larger amount of money than the one you have been set with at the beginning of the repayment term.
So, if you have a large amount of money and think of ending the mortgage loan sooner, you will be seriously penalized for this. Why? Because the lender doesn't need you to end up the loan without paying interest to it for many years, now you see why?