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Mortgage and Financing | Financing Your Purchase
Financing Your Purchase
Unless you can afford to pay cash (in which case you’ll be a very popular buyer!), you’re going to have to finance your home purchase. Navigating the loan process is easier if you understand some basic terminology. In exchange for the money you borrow (the "Loan"), you will give a written promise to the lender, detailing the terms of repayment (the "Promissory Note"), including the initial amount borrowed (the "Principal"), the cost of the Loan ("Interest") and the time frame for repayment (the "Loan Term"). You will also pledge your home as security for repayment of the loan (the "Mortgage"). Basically, you get the money, and the lender gets the Note, backed by the Mortgage. The lender records the Mortgage in the land records of the county where the property is located, creating a lien on the property and providing potential buyers and others notice that the Lender has a security interest in the property. When the Loan is paid off, the lender satisfies (removes) the Mortgage from the public record.
Principal The original amount of the Loan.
Interest The amount the lender will charge you for the use of the principal. How much you pay depends on a number of factors, including the type of loan, the interest rate and the length of time you have to repay the principal. One of the most attractive benefits of financing your home purchase is that you may be able to deduct the interest you pay on the Loan from your personal income tax obligation. Consult with your tax advisor for more details about the tax savings benefits.
Amortization Refers to the reduction of principal through payments. Modern mortgage loans are calcuted to be "self-amortizing", i.e., the regular, fixed, monthly payments over the term of the loan will not only repay the original principal but also the interest that accrues on the declining principal balance. During the early years of the loan (typically for the first 2 to 3 years on a 30-year loan), most of the payments will be applied toward interest. During the later years of the loan, a greater percentage of each payment will be applied to principal.