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A mortgage is a long-term loan acquired from a bank, an independent mortgage broker or the property seller. It is normally used to purchase a home. Due to the large size of the mortgage loan, a borrower will often pay it off over a long period of 15 to 30 years. When purchasing a home you would typically go through the following stages:Three months before your desired moving date:
On your moving date:
What is in a Payment?
Sometimes borrowers can choose to pay the RET and insurance as periodic lump sums rather than as supplements to their monthly repayments.
What is Amortization?
Amortization is a system of repaying a mortgage loan where the monthly payment remains fixed during the whole loan term. The principle and interest proportions making up these payments gradually change through the term.
The lender cannot expect the borrower to pay the entire sum at once and so the interest is spread over the full term of the loan. During the early years of the loan, most of the payment goes towards interest with a smaller amount paying off the principal. To keep each monthly payment fixed over the loan period a repayment formula is applied so that the principal proportion of the payment gradually increases over time while the interest proportion decreases.
Here is an example:
A 30-year $200,000 mortgage with a fixed rate of 6 percent will require the homeowner to pay a total of $224,347 in interest. At the start of the repayment period $1179 will be paid each month. Only $205 will go toward reducing the principal, while the other $974 will go toward interest on the loan. At the end of the repayment period $1179 will still be paid but $1173 will conclude the principal repayments and only $6 will go toward interest.
Types of Mortgages
Here are the two most frequently used mortgage types:
To read more on mortgage types, see ARM vs. FRM.
How much money do I need to apply for a mortgage?
On closing day (the day you move into the home), you typically need to have enough money for the down payment and the closing costs. The down payment is usually 5-15% of the loan amount, although this may vary with your personal circumstances. The closing costs can be up to 4% of the loan amount.
How much money will I pay in total?
What is Prequalification?
Prequalification is the first step in applying for a mortgage. The lender will analyze your income, debt and credit history in order to determine your maximum loan amount. Prequalification does not impose any obligations on the lender or the borrower. Information submitted during prequalification is verified when you are applying to purchase your selected home.