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Dissecting a
mortgage
Most people understand the basic gist
of what a mortgage is. It is something
that allows you to borrow a large sum
of money to buy a home. If you are going
to pay so much for this thing, this
mortgage, you may want to have a better
understanding of what it actually is.
“The Anatomy of a Mortgage”
is an article posted on loansrc.com,
which explains the components and intricacies
of a mortgage.
“What exactly is a mortgage? Simply
put, it's a loan from a financial institution
to you. In return, you pay interest
on the amount loaned. The lender also
has first dibs on your house in case
you neglect to pay
back the loan.”
There are three main components
of a mortgage; size (how much you
need to borrow), interest (the percentage
rate you pay on the loan) and term (the
amount of time it will take to pay off
the loan).
The size of the loan is pretty much
self explanatory. You may not want to
take out as much as you qualify for,
to save your premium from being too
high.
The interest rate is usually discussed
in terms of APR, or the annual percentage
rate.
“The annual percentage rate is
a method developed under federal law
to disclose to loan applicants the actual
amount of interest that will be paid
on a given loan, over the life of that
loan. It makes it easy to compare one
mortgage to another by making it an
apples-to-apples comparison.”
An important thing to know is that APRs
use points. A point is equivalent to
one percent of the loan amount. So,
if a loan is $100,000, one point equals
$1,000.
“There are two types of points:
origination and discount. Origination
points are the fees normally charged
by a lender, for originating, or starting
up, your loan. Discount points are charged
to lower your interest rate, and this
lowers your payments. In other words,
if you pay some more money up front,
the bank will let you pay less over
time.”
Both types of points should be considered
interest that you pay upfront. Don’t
forget to calculate points into your
loan repayment.
So, if you take out a loan for $120,000
at nine percent interest for 30 years,
and you pay one origination and one
discount point, you’re paying
a total of two points which equals $2,400.
Thus your monthly payment will be $965.55
per month.
“To get the proper APR on your
loan, then, you have to add that $2,400
to your starting balance. This makes
your total loan $122,400. Figure the
new payment on that balance, which works
out to $984.00. Now return to the original
loan amount and (ready, mathematicians?)
compute the polynomial backwards to
reach the interest rate it would take
to equal the payment on the total loan.
It works out to roughly 9.23%.
Maybe it is not the easiest thing to
compute, but you can work the formula.
Finally, you should understand terms.
The most common terms are 15-year and
30-year terms.
A 15-year term will have a higher monthly
payment, but you will pay the loan off
in half the time.
Conversely, a 30-year term will have
lower monthly payments but higher interest
rates. This means that not only will
you be taking twice as long to pay the
loan; you will also end up paying much
more for it.
Now you really know the basics. Still,
whenever you apply
for a mortgage loan, take your time
and read all the term carefully. |
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