If you are looking for a property but are confused about all the jargon involved in mortgage lending, then this guide could help you. If you are confused between caps, bridges and balloon payments, then here are some useful tips about how to understand various mortgage terms.
ARM and FRM
ARM stands for Adjustable rate mortgage, and FRM stands for fixed rate mortgage. An adjustable of variable rate mortgage is one that has a changeable interest rate, which is usually linked to the performance of a particular financial index. A fixed rate mortgage is the most common type of mortgage, and has a non changing rate of interest over the entire mortgage term
Balloon payments
Balloon payments are the final lump sum payments that you make on a mortgage. If you have an interest only mortgage or one that includes you paying a large percentage of the capital at the end of the mortgage, then you should make sure you know the exact amount you need to pay. If you cannot make a balloon payment then there is the possibility that you could lose your home.
Caps and bridges
A mortgage cap is a limit on the amount of interest you can pay on an ARM. For example, if you have a cap of 1% then and you currently pay 5.5%, then you can only be charged between 4.5% and 6.5% if things change. A bridge refers to a loan you can receive in order to buy a new home before your current one is sold. The loan ‘bridges’ the gap of finance that you are suffering. You can use your current home as the collateral for the loan and pay the money back once you have sold the property.
Amortization
Amortization is a term that confuses many people, as it is not obvious from the word what it is referring to. Amortization simply means the process of paying both the capital and interest back on your mortgage in monthly payments. If you have an interest only mortgage then you won’t be subject to amortization.
Compound interest
Compound interest is something that you should be aware of, as it can cost you a lot of money. When calculating your repayments, you are sometimes the subject of compound interest. This means you are paying interest on the amount capital amount of the loan, as well as interest on the unpaid interest of the loan. In effect you are paying two types of interest, hence the interest is compounded. If you are looking for mortgages then get the lender to explain the level of compound interest that you will pay.
If you don’t understand, ask
These are some of the terms that are often used when talking about mortgages, although there are many others as well. Getting a mortgage is a big step, so if you are unsure about what something means or do not understand, then ask the lender to explain it to you. If you choose the right lender then they will be happy to explain the terms and processes of mortgages to you so that you know what you are signing for.
Peter Kenny is a writer for creditcards-gb.co.uk.
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