A mortgage is a loan that a borrower
obtains for the purchase of real estate. A mortgage is
obtained from a financial institution and sometimes even the
property seller. Typically, the lender will loan as much as
75% of the value of the property to the borrower. The
building/s and/or the land purchased by the borrower are the
collateral for the loan. If the borrower fails to make the
payments stipulated in the contract, the lender can seize
the home through a process known as foreclosure.
Mortgages tend to be very large loans and as such, borrowers
usually pay them off over long periods, often between 15 and
30 years. With each monthly payment, a mortgage pays
interest on the loan, and usually some of the principal, so
that gradually over time, the loan is payed off. By
spreading the payments over a long period of time, financial
institutions make real estate affordable.
The amount of each payment that goes toward interest and
principal changes as the loan is paid down. Typically, in
the early stages of paying off a mortgage, the payments are
mostly interest with very little going toward paying down
the principal. As time passes and more payments are made,
the percentage that goes toward interest declines and the
percentage that goes toward principal increases. By the end
of the mortgage, the monthly payment goes almost entirely
toward the principal with very little interest being paid.
Once the mortgage has been payed off in full, the borrower
has full equity in the property.
While this is how a typical mortgage works, known as a
repayment mortgage, there is also another type of mortgage
called an interest only mortgage. With an interest only
mortgage, you only pay the interest on the amount you
borrowed, so you will still owe the entire principal of the
loan at then end of the mortgage and you’ll need to plan how
to pay this off. Interest only mortgages can be a good
choice for those who are unable to afford a repayment
mortgage, but expect to have more money in the future to pay
down the principal.
Once you have decided whether you want an interest only or a
repayment mortgage, there are many variations to choose
from. Two major types of mortgage are fixed rate and
variable or adjustable rate mortgages. With a fixed mortgage
rate, the interest rate is set for the entire term of the
loan. This means that the monthly payments do not fluctuate,
enabling the long-term borrower to budget and plan their
finances over the long term.
By contrast, under variable or adjustable-rate mortgages
(ARMs), the interest rate will periodically go up or down
based on a predetermined index. This means that the
borrower’s monthly payment may fluctuate over time. This
type of mortgage is more of a gamble, since the borrower
will pay more if interest rates rise or less if interest
Unlike fixed-rate mortgages, some ARMs give borrowers the
opportunity to pay off the principal amount early without
penalty. To protect the borrower, there is usually a maximum
limit that interest rates can rise in a year or over the
term of the mortgage. In addition, borrowers are often
offered a fixed interest rate for the initial period of the
mortgage before rates start to fluctuate. Since ARMs
transfer the risk from the lender to the borrower, lenders
often offer very low initial rates, making this type of
mortgage attractive to short-term investors.
There are several other types of mortgages available. A
negative amortization mortgage enables the borrower to pay
back less interest each month than is owed. The interest
that is not paid is added to the total that the borrower
owes the lender. This is also known as a deferred interest
or graduated payment mortgage.
A discounted rate mortgage is one in which the lender offers
a discount off its standard variable rate mortgage for a
period of time, typically two years. Once the period has
elapsed, the rate is reverted to the standard variable rate.
This is ideal for young home-owners and first-time buyers
who believe that when the discount period ends, they will be
able to afford the higher payments.
Another type of mortgage is known as the balloon payment
mortgage. Under this type of mortgage, borrowers get lower
rates and payments for some time, typically three to ten
years. At the end of that time, the borrower has to pay the
principal in full, making the final payment much larger than
the regular monthly payments. This mortgage is ideal for
those who plan on selling, refinancing or selling their home
before the balloon payment is due.
Refinancing is paying off your existing mortgage with
proceeds from a new mortgage. Refinancing your mortgage is a
way of replacing high interest debt with a loan that has a
lower interest rate, or to withdraw equity they have built
up in their home. Refinancing can also enable you to switch
from a fixed to a variable rate mortgage and vice versa.
With our extensive knowledge of
coastal communities, we serve the La Jolla area, including
Del Mar, Rancho Santa Fe, Pacific Beach, Coronado and San
Paul Palumbo - Sharon Palumbo
Prudential California Realty/La Jolla Realtors
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1299 Prospect Street
La Jolla, CA 92037