The Truth About Important Loan Terms

Taking your first steps in the home loan industry can indeed prove daunting. When you come across terms such as Amortization, Collateral, Escrow, and Mortgage, et al, it all seems Latin to you. Anyway, with as great an inducement as the hopes of owning a house, you really need to master important loan terms. Signing a mortgage contract requires you to shoulder responsibilities with great caution because it involves sizeable capital exchange and even puts your very house (which is used as a collateral or security) at stake. No wonder you need educating yourself on important loan terms and acronyms to safeguard self (as well as the apartment/house) against possible gaffes that you will face in your real estate dealings.

To start with, we introduce you to the term "principal". The principal is the sum of money a loan seeker borrows to conclude a home purchase deal. The principal amount, however, is issued and passed on to you only when you make an investment from your end. This investment is known as down payment. The amount of down payment depends on the total cost of the house (which normally is about 20% of the principal amount).

Next, we deal with the rate of interest. The rate of interest is the profit percentage that is levied on the borrowed amount. Financers and financing bodies usually charge borrowers' points in addition to the interest rates. (A point is a value equal to about 1% of the total loan finances).

The rate of interest varies depending on the home loan type. The loan user is required to reimburse the principal amount along with the interest in monthly installments. This method of repaying the loan is known as Amortization. The payments you make go towards clearing the interest for the first few years. The payments you make later on in the loan term pay off the principal. (Loan term is the period over which you repay the loan. The loan term too is decided by the mortgage type).

Let us now brief you on the mortgage types. Home loans are basically of four types: Fixed Rate Loan, Adjustable Rate Loan, Convertible Loan and Special Loans.

Fixed Rate Loans are home loans that impose a flat rate of interest on the loan amount for a definite loan term (usually 30 or 15 year loan period). As such, you will be required to pay a fixed monthly installment throughout the time-period.

Adjustable Rate Loan is a mortgage type, which imposes a variable rate of interest on the principal sum borrowed. Your monthly installments rise and fall depending on the alterations in the rate of interest. Some financers choose to increase the loan period instead.

Convertible Loan is an exchangeable loan. To begin with, the mortgage may be either a fixed rate mortgage or an adjustable rate mortgage. However, you may later on go for a conversion to the other kind. Usually, homebuyers accepting adjustable loan mortgages at the beginning switch over to some fixed rate mortgage when they chance on a low rate of interest.

Special Loans are exclusive loans including government-sponsored mortgages like the FHA and VA loans. FHA is the ideal home loan for first-time homebuyers and individuals stuck in some kind of credit crisis. VA loans, on the other hand, are for veterans of the Armed Forces and their families.

Other important loan terms, which you will most often come across in your real estate dealings, are as follows:

Home Insurance : Home Insurance is a crucial term because it insures your apartment/house against damages from fire, flood and other natural hazards. It also provides protection against burglary and robbery. Homeowners are not allowed to close or conclude the mortgage unless they get their residence insured. Having a home insurance is indeed a good idea because you are spared major investments for repairs and maintenance. (A down payment of less than 20% of the total borrowed amount calls for additional premiums on Insurance. This way you are well protected against any defaults on your loan).

Property Tax : Property Tax is the amount of money you need to pay to the government while acquiring a property (residence) for self. The tax you pay to the government is spent in national interest for development works and different public projects.

Escrow Account : An escrow account is a neutral third party account through which special monetary transactions are carried out in a mortgage deal. Money placed in the escrow account is used to take care of expenses on insurance, tax and other important expenditures.

Closing Costs : Closing Costs are the fees you will be required to pay when the mortgage papers are signed and which seals the ultimate transfer of the ownership of the home.

These nearly sum up all the important loan terms. It is quite likely that your financer will give you specific information about the APR (Annual Percentage Rate), payment terms, etc. when you apply for a home loan but some fore-knowledge is surely going to help clinch a good home finance deal. -------------------------------------------------------------------------------------------------------- If you are a business owner get listed at Best Finance Site, part of Localwin Network.