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Components of a Loan
Whenever money is borrowed, a fixed loan will always have the following four basic components:
Principal: The sum of money owed as a debt not including any interest. The face value of a note or mortgage.
Interest: Interest is what lenders charge you to use their money. It accumulates over time on the unpaid balance of money you borrowed, and is expressed in a percentage called interest rate.
Term: A loans term is the amount of time youre given by a lender to repay money that is borrowed. Smaller loans generally have shorter terms than larger loans. Lenders allow more time to pay back large loans to make the monthly payments more affordable. There are many different loan terms but the most common ones are the 30 year and the 15 year. The payment on a 30 year term is much less than a 15 year term but the interest paid on a 15 year is much less than then a 30 year.
Example
On a $200,000 loan amount with 6% interest rate, the payment over 30 years would be $1199.10 per month. The total interest paid over the life of the loan would be $231,676.38
On the same $200,000 loan amount and interest rate over a 15 year period, the payment per month would be $1687.71, but the total interest paid over the life of the loan would be $103,788.46
Amortization: The process of reducing a debt by making periodic installment payments throughout the loans term. Loans are amortized (repaid) with monthly payments consisting primarily of interest, during the early years of the loan term and principal, which the lender uses to reduce the loans balance. If your loan is fully amortized, it will be repaid by the time youve made your final loan payment.
An adjustable rate mortgage will have the following components:
Principal
Index
Margin
Interest Rate
Ceiling
Floor
Term
Adjustment Cap
Lifetime Cap
These components will be explained below.
Principal
The portion of your monthly payment that reduces your mortgage balance. If you have an interest only loan you will not be making any principal payments unless you pay more than your minimum payment.
Advantages of owning a home - There are many reasons for home ownership and everyone may have different ideas on why to own a home.
A big advantage to becoming a home-owner is the tax advantages. The interest paid on your mortgage can be written off at the end of the year. This is not the case with your rent payments. You should consult a certified public accountant (CPA) to see just how much of a tax advantage home ownership can be.
While there are many practical benefits to home ownership, there are also many other benefits. You can paint your walls any color you want. You can landscape the house however you see fit. You won't have to deal with loud footsteps from the apartment above you. There are many, many things that you will be able to do that would not be allowed to in an apartment, which may be the most fulfilling part of owning a home.
Only homeowners get to take direct advantage of real estate appreciation. Many people who stay in their home 10 or more years eventually find their property has appreciated into a small fortune. Some people choose to take cash out of their home equity to invest for an even greater return. Others eventually down-size in their later years and use proceeds from the sale of their home to supplement their retirement income.
One reason or advantage of owning a home is the freedom of homeownership. Homeownership provides a certain freedom that you are not able to experience in an apartment, a college dorm, in your parent’s house, in a duplex, or even renting a home from a landlord. It is a wonderful feeling to know that the house you own is yours and you are actually investing in your future. With owning a home you have the freedom to decorate as you want, the freedom to add on however much you want, improve the home to your needs, and many other freedoms as well. Consult a mortgage professional to find out more information or to see how much you qualify for today!
Another advantage of owning a home is that your monthly housing payment will stay fairly constant, especially with a fixed rate mortgage. If you rent, however, your housing payment will most likely go up every 1 to 2 years.
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