Mortgage Terms you need to know:
One of the most important things you need to do before signing a mortgage contract is to get the as much information as you can about the terms applicable. In this article we will discuss some of this terms.
Annual percentage rate (APR)
Annual percentage rate is a measure of the cost of credit expressed as a yearly rate which includes interest as well as other charges. It provides consumers with a good basis for comparing the cost of loans and mortgage plans, since all lenders follow the same rules.
Adjustable-Rate Mortgage (ARM)
Adjustable-Rate Mortgage is a mortgage type where the interest rate is not fixed, but changes during the life of the loan in line with movements in an index rate. The interest rate is always variable.
Assumability
Assumability is a state in mortgage when the rates and terms are assumable. These happens when homeowner sell his home and transfer the mortgage to new owner. Some lenders don’t allow transferring mortgage from one person to the other. Where it’s allowed – lenders may require reviewing credit of the new borrower and may charge a fee for the assumption.
Buydown
Buydown means that seller pays an amount to the lender so that the lender can give him/her a lower rate and lower payments option in early period of adjustable rate mortgage. It can also be applicable in other types of mortgage.
Cap
Cap is a limit on how much the interest rate or the monthly payment can change.
Conversion Clause
Conversion Clause is a provision in some adjustable rate mortgages that allow you to change the ARM to a fixed-rate loan at some point during the term, most usually at the end of the first adjustment period.
Index
Index is the measure of interest rate changes that lender uses to decide how much the interest rate on an ARM will change over time. Its changes often and it’s not always easy to know when it will go up or down.
Margin
Margin is the number of percentage point the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Amortization
Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage.
Negative Amortization
Negative Amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn’t covered is added to the unpaid principal balance. This will add to your debt even after making payments.
