Mortgage Lingo Explained

If you own a home, perhaps you got it through a mortgage, or had one but finished paying it off. Question is how much do you know about mortgages? For as long as I can remember, mortgages have been a fact of life – if one thought of owning a house, there was a mortgage plan available. Perhaps the much you know is that you walked into your bank or lending institution with your employment and tax info and hoped against all hope that you had made enough and saved enough to qualify for a mortgage.

In the mortgage application paper you see terms like amortization periods of 20-25-30-35 years, one year terms, five year terms, fixed rate mortgages, adjustable rates mortgage, open rates mortgage… but anyway you append your signature without much thought after all, a mortgage is all you want right? And whether you read the lingo or not makes no difference. But, here is some mortgage terms broken down for you to help make you better prepared next time you are ready to start applying for a mortgage.

Amortization period
This is the duration of the entire mortgage – the time it will take the mortgage to come to maturity. Initially, the amortization period was set at 25 years but with changing times, this period has been adjusted to 30, 35, and even 40 years of home loan maturity. Remember, an extended amortization period means you will get low monthly payments but on the other hand end up paying a higher amount of interest. Rather than pay an interest of 25 years, you will pay of 30 or more years.

Term of mortgage
While amortization period is the entire length of your mortgage, actual mortgage term will range between 1 and 5 years. The term of mortgage is simply the current rate of interest and type of mortgage you have applied for during that time. For example, you can apply for a mortgage amortized over 30 years with a 4-year closed term at a fixed mortgage rate of 7.2%. Alternatively, you could apply for a mortgage amortized over the same 30 years with a one year open term attracting a fixed mortgage rate of 8.4%.

Closed and Open Mortgage Term
In a closed term mortgage, you have to pay the mortgage until the amortization period ends, failure to which you will pay off some penalties. If on the other hand you get an open mortgage term, it means that if you decide to put a new mortgage on, or pay off the mortgage in between the amortization period you will not be charged any penalties. Most mortgages fall under the closed term category. However, if you plan to sell the house before the term expires, or are waiting for mortgage rates to drop, or perhaps you are expecting some huge cash somewhere which you can apply on your mortgage, you will be better off with the open term mortgage.

One more thing, remember that in a closed term mortgage, the longer the term of mortgage, the higher the rate of interest. In a nutshell, mortgages have very many important factors that you should be aware of so that you can make an informed decision when appending your signature on that dotted line.