Gilbert AZ Mortgage Terms – A Few Basic Mortgage Terms You Should Understand
Many first time homebuyers enter into a contract to purchase without knowing the first thing about financing. Oftentimes, they choose an unsuitable mortgage loan that really does not fit their financial goals. Learning a few basic terms may help to avoid costly mistakes when financing a home:
A mortgage is a form of a loan intended for buying a house or other real property in Gilbert, AZ or anywhere for that matter. Like any other loan, a mortgage loan charges interest. Common terms referring to mortgage loans include:
Interest and Principal -- At the begining of the loan term, a large amount of the repayment consists of interest charges while the remaining amount covers the repayment of the principal (the amount borrowed). The interest rate is the charge that the bank makes you pay to lend you the money. This interest rate will vary depending on several factors, including down payment, type of property, your creditworthiness and type of loan.
ARM (Adjustable Rate Mortgage) -- this type of mortgage is an excellent way for you to qualify for a loan when just getting started or on a limited budget. Unlike a fixed rate mortgage, the ARM will go up or down from year to year depending on the Index it is tied to. In today's money market, there's not much difference between adjustable rate and fixed rate mortgages, so if you don't like surprises, you might be better off with a fixed rate mortgage.
FHA Mortgage -- The Federal Housing Administration guarantees against your default with this type of loan. It is a very good choice for a a first time buyer or someone who does not have too much to spend on a down payment. Your down payment can be as little as 3.5% of the purchase price. Note that there will be a MIP (mortgage insurance premium) due which will raise your monthly payment a little. Considering that starter homes in Gilbert AZ cost a minimum of $130,000, a down payment of less than $5,000 is a bargain!
Equity -- This is determined by the down payment you make when acquiring a mortgage. If the total value of your property is $500,000 and your mortgage covers $400,000, the equity you own on that property is $100,000. This represents the down payment you made. As the years go by and you pay down the principal, your equity will increase.
Amortization -- The mortgage loan repayment period, also known as amortization, is the length of time you take to pay back your mortgage. This period is usually between 15 and 30 years, however there are some loans that have a 40-year term. Its important to note that the longer the repayment term, the more interest you will pay over time. You can view the relative monthly payment versus overall interest paid if you look up Amortization Tables.
Prepayment -- Most mortgages today allow you to pay more than is owed without any penalty. To limit the amount of interest you will pay and build equity faster, you would be wise to pay more each month than is owed. You can also build equity faster by paying every two weeks instead of once a month.
Mortgage Insurance -- Unlike homeowners insurance which covers you in the event of a loss due to fire or other damage to the home, mortgage insurance covers your lender in the event of your default. You will find that most lenders require this insurance (paid monthly) if your down payment is less than 20% of the purchase price.
Home Equity Line of Credit (HELOC) -- This is a type of mortgage loan that homeowners often use to supplement the original mortgage loan they got when they purchased their property. It is often used for home improvements such a remodeling or putting in a backyard pool in Gilbert. Since a Home Equity loan chips away at the equity you have in your home, it is not recommended for consolidating bills or buying a vehicle.
Before you start looking for Gilbert AZ homes for sale you will need to be pre-qualified by a lender. If you need more information or the name of a trusted loan professional, please contact me.
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