If you're getting ready to apply for your first home loan,
you're going to need to understand the home loan basics.
Home Loan Basics
When you go to apply for a home loan, you need to understand the
terminology. Let's start with the most basic of terms.
1. Principal - The principal is simply the amount you borrow to
move into the home of your desires. If you apply for a loan of
$250,000, the amount the bank actually gives you is the
2. Interest - Every home loan comes with an interest rate. The
interest rate is the amount a lender is charging you to borrow
the principal. Interest rates are typically the key to a loan as
there are a wide variety of loans that have flexible interest
rates that change every year, ever few years or simply remain
set over time. In general, you want to minimize the interest
rate as much as possible.
3. Term - The term of the loan is simply the number of months
you have to repay the money you've borrowed from the lender. For
instance, a 30-year fixed rate mortgage is indicative of a term
of 360 monthly payments to be made over 30 years. Don't worry,
there are loans of much shorter periods of time.
Amortization is not only a mouthful, it is the one term that may
confuse you during the loan process. First time home buyers
often mistakenly assume the same amount of interest and
principal will be reduced in each loan payment. Unfortunately,
lending institutions are not willing to go about it this way,
which leads us to amortization.
With amortization, lenders typically apply many of the initial
payments on your mortgage almost entirely to the interest owed
on the loan. If your loan calls for monthly payments of $1,000,
the first payment may have $900 applied to interest and only
$100 applied to the principal. As the months pass, the amount
paid on the principal will increase. Yes, it is maddening.
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