Monday, April 24, 2006

Terms of Mortgage

A down payment has traditionally been required as part of the mortgage process. This is an up-front cost for the borrower and has typically been between 10 and 30 percent of the value of the property. However, nowadays lenders are even more willing to offer "low down payment" or even "no down payment" mortgages to those who qualify. Often, down payments of 5-10 percent are acceptable through today's mortgage lenders.

Mortgages normally last 10, 15, 20 or 30 years in duration. The monthly payment consists of the principal (property value payment) and interest. For longer duration loans, the interest can often compose the majority of the payments. For loans of a shorter duration, the total interest cost is much less, simply because the interest compounds less over the shorter loan duration. For either type of duration, the interest portion of the payment is higher towards the beginning of the mortgage, and as the payoff progresses, the interest cost is reduced as the value of the property is slowly paid off.

An Annual Percentage Rate (APR), or interest rate, will apply to the balance of the mortgage. This rate is typically between 5 and 8 percent, annually. There are two types of APR's: Fixed Rate and Adjustable Rate Mortgages (ARMs). The fixed rate mortgage is established and never changes, the payments will always be fixed. Adjustable rate mortgages have APRs that are fixed for a certain period, then they can be adjusted monthly or annually according to certain federal interest rates. Often, ARMs have a lower initial APR, even one or two percentage points lower than the fixed rate. This advantage comes with the risk of assuming a higher interest rate during later periods of adjustment.

Also more common nowadays are "interest-only" mortgages which permit the borrower to make payments on only the interest portion of the mortgage, rather than pay any principal.

Sometimes extra fees may be imposed on the borrower during the mortgage process, including entry fees, exit fees, administration fees, and lender's mortgage insurance.