Mortgage Tools
Understanding Mortgage Loans
It can be intimidating and unnerving to assume a debt as large as a mortgage. As with any purchase decision, a little knowledge can go a long way. Understanding mortgage loans is easier with a little background information and the help of a certified mortgage broker.
Mortgage Basics
Given all of the industry jargon and the large dollar amounts in play, the average consumer can easily become overwhelmed when shopping for a mortgage. CMI has put together this summary of basic mortgage facts to help you gain an understanding of what's involved in your mortgage transaction.
A mortgage is, very simply, a loan for purchasing a home or other real estate. The loan is secured by the property itself.
Two of the keywords associated with mortgages are "terms" and "amortization". The term is the length of the current mortgage agreement. Mortgages can run anywhere from 6 months in length to ten years, but the five-year mortgage is one of the most popular. (We'll explain why when we talk about rates). At the end of the term, you must either repay the loan or renew your mortgage.
The amortization is the number of years it takes to pay the mortgage off completely. With a long amortization, your individual payments are lower, but you end up paying more overall because of the extra interest you incur for holding the loan so long. A shorter amortization means higher payments, but a lower overall cost of borrowing.
A mortgage rate is the rate of interest charged for borrowing the money. Mortgages typically offer fixed and variable rates. Variable rates are based on the current prime rate and tend to be lower, but they will increase when the prime rate goes up. Fixed rates, although costlier, offer stability - with a fixed rate you always know what your payment will be.
Of course, if you are locked into a fixed rate and interest rates go down, you could find yourself paying significantly more. That is why 5-year mortgage terms are so popular. After five years, if rates are lower than what you locked in for, you can renew at a lower rate or even choose a variable rate mortgage.
There are other terms that you should understand before looking for a mortgage:
- Open vs. Closed - Closed mortgages typically have to remain unchanged throughout the term. That is, you cannot make prepayments, refinance or renegotiate before the end of the term without paying a penalty. The benefit to closed mortgages is a lower rate. Open mortgages generally allow prepayments in any amount without penalty.
- Portable Mortgages - If your mortgage is portable, you can carry it with you when you purchase a new home.
- Assumable Mortgage - A mortgage that is assumable can be taken over by the buyer when you sell your home. This is a particularly attractive option if the mortgage has a lower rate than the current market rate. Buyers may still need to be approved before assuming a mortgage.
CMI Can Answer Your Questions
If you need help understanding mortgage loans, we invite you to schedule a free consultation with a CMI certified mortgage broker.
