There are so many terms associated with home buying and home ownership: mortgage loan, closing, title and escrow.
It can be confusing for first time homeowners and experienced owners alike. Understanding what a mortgage loan is and what that means for your situation is essential to making good decisions when it comes to buying or selling a home.
What is a Mortgage Loan?
This type of loan is a loan from a bank or other financial institution that allows the borrower to purchase a home. Mortgage loans differ from other loans in that the home itself is the collateral on the loan. That way, if the borrower fails to make payments, the bank can take possession of the home and recoup their financial losses.
How Does It Work?
Mortgage loans are issued to the home seller in one lump sum, and then the borrower pays back monthly installments on the mortgage. Every monthly payment has two parts: principal and interest.
The principal is the amount the bank gives the borrower for the home. The principal on a $250,000 mortgage loan is $250,000. The interest is the amount the bank charges to loan you that money. Interest rates can vary from 2.5% to 12.75%, depending on the lender, the borrower’s credentials and going market rates. Naturally, lower interest rates mean smaller monthly payments.
Each month a portion of your monthly payment on your mortgage loan goes toward paying off the principal amount, and the rest goes toward paying interest. The longer your loan terms are, the more interest you will pay over the life of the loan. Paying off loans ahead of schedule will result in less interest paid over time.
What Else is Included in My Mortgage Payment?
Every loan agreement is different, but some other common things that are included in mortgage payments are property taxes and homeowners insurance. Property taxes are estimated annually and the lender will keep the amount of taxes you pay each month in a special account called escrow. When the taxes are due, the bank will pay the taxes from the escrow account.
Homeowners insurance is required by banks to protect the home in the event of a disaster. Sometimes a lender will collect premiums for insurance as part of the loan, place the money in escrow, and make the payments for insurance when they are due.
How Do I Get the Best Loan?
Mortgage loans can vary greatly by lender. If you’re feeling the need to refinance to get better loan terms or want to buy a house and need to get a loan, it’s important to do your due diligence and shop around with various banks and financial institutions to see who can offer you the best loan terms. Start with the bank you use for your everyday banking, but don’t just assume they will give you the best deal. Check rates online, call different lenders and find what works best for you.
Local Home Buyers is Here
If you’re feeling overwhelmed by your loan, Local Home Buyers can help. We buy homes in any condition for cash, and can close on any day you choose. We buy houses in Huntsville, Alabama, and the surrounding areas. Give us a call today to get your cash offer!