If youre getting ready to apply for your first home loan, youre going to need to understand the home loan basics.
When you go to apply for a home loan, you need to understand the terminology. Lets start with the most basic of terms.
1. Principal The principal is simply the amount you borrow to move into the home of your desires. If you apply for a loan of $250,000, the amount the bank actually gives you is the principal amount.
2. Interest Every home loan comes with an interest rate. The interest rate is the amount a lender is charging you to borrow the principal. Interest rates are typically the key to a loan as there are a wide variety of loans that have flexible interest rates that change every year, ever few years or simply remain set over time. In general, you want to minimize the interest rate as much as possible.
3. Term The term of the loan is simply the number of months you have to repay the money youve borrowed from the lender. For instance, a 30-year fixed rate mortgage is indicative of a term of 360 monthly payments to be made over 30 years. Dont worry, there are loans of much shorter periods of time.
Amortization is not only a mouthful, it is the one term that may confuse you during the loan process. First time home buyers often mistakenly assume the same amount of interest and principal will be reduced in each loan payment. Unfortunately, lending institutions are not willing to go about it this way, which leads us to amortization.
With amortization, lenders typically apply many of the initial payments on your mortgage almost entirely to the interest owed on the loan. If your loan calls for monthly payments of $1,000, the first payment may have $900 applied to interest and only $100 applied to the principal. As the months pass, the amount paid on the principal will increase. Yes, it is maddening.
Sergio Haros is with Great Western Mortgage - San Diego Mortgage Brokers - providing San Diego home loans. Great Western Mortgage is a San Diego mortgage company writing San Diego mortgages and San Diego refinance and home equity loan.