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Mortgages for Dummies Definitions

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If you are a homeowner wanting to take out a 2nd mortgage or a home equity loan, you may want to brush up on mortgage basics. Here is a brief overview of mortgage refinancing loan terminology.

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Amortization This is the single most scary word in the mortgage world. Amortization refers to the amount of interest paid over the term of the loan versus the principal balance repaid. Mortgage loans are front loaded with interest meaning that you will pay more interest than principal at the beginning of your loan. An Amortization table shows you how much you are paying to interest and principal during the life of your mortgage.

Interest Rate The interest rate is the amount you are paying the lender to provide you the loan. Interest rates come in two varieties: fixed interest rates and adjustable interest rates. Fixed interest rates do not change for the entire duration of your loan. Adjustable interest rates change to whatever the current market rate is at the time of adjustment plus the premium amount your lender is charging you. The adjustment period varies from loan to loan; for example if you have a 5:1 adjustable mortgage your interest rate will not change for the first five years; after the 5 year period your interest rate will be recomputed every 1 year. (Hence 5:1)

Principal Balance The principal balance of your mortgage loan is the mount you borrow from your lender. If you apply for a $160,000 mortgage loan the principal balance is $160,000.

Term The term of your mortgage is the duration your lender has given you to pay back the loan. If you take out a 30 year fixed interest rate mortgage you have 30 years or 360 months to pay the loan back. Terms vary depending on the type of mortgage. Common mortgage terms are 1 year, 5 year, 15 year and 30 year mortgages.

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