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Tough Terms In Mortgage Loan Topics Explained

Jun 24, 2008
Too often we see borrowers become confused with the complex terms that financial professionals use. And in the situation of obtaining a mortgage loan, misunderstanding a term can prove to be a huge mistake for borrowers that they may regret for years to come.

The first two more basic terms that every mortgage loan borrower should know is ARM and FRM. ARM, or adjustable rate mortgage, has an interest rate that can change based on the economy or through refinancing options. On the other hand, we have FRM or fixed rate mortgage, which has a set interest rate that does not change. It is usually accepted that one or the other is picked based on the economy and future projections on how the economy will perform, in addition to one's own budget.

The equity of one's home is important to understand. The equity is a number that is obtained by subtracting the amount owed in a mortgage loan from the total value of the property. As an example we could say that we have a property valued at $50,000 and an outstanding debt in mortgage loans valued at $40,000. We would then get an equity of $10,000 by subtracting the mortgage loan amount from the original worth.

The value of a home can be used in a mortgage loan three different ways. The appraised value of a home is simply the value a third party estimates the price to be. And estimate value is usually the same thing, but the lender has an internal appraisal guide to estimate the price instead of using a third party in the equation. Lastly we have the actual value, which is the amount that the borrower paid for the property when purchased.

Should the buyer default on the mortgage loan, they will seek to lose their property. Two terms are used in this scenario: foreclose and repossess. A foreclosure is the act of a property being taken by the bank and usually being sold or auctioned to regain lost investment in the borrower. A repossession is more common among vehicles or movable types of property- such as a mobile home or moveable living space. Either case can be quite frustrating, but even after such acts borrowers can get such items back under certain terms under the agreement signed.

100% mortgage loans are also available to those who may request them. Usually a mortgage loan requires a deposit so lenders don't suffer too much risk all at once. But with a 100% mortgage loan this deposit is waived and the consumer gets more money as a result. Other options similar to this are present, some in which consumers can get as high as 125% of their property value in cash.

Closing Comments

The process of obtaining a mortgage loan will give anyone a headache in the vast amount of new financial terms they need to remember. But the process doesn't have to be all frustration, as learning the topics beforehand can make the borrower that much more educated and likely to obtain a better deal with the mindset that they know what they are looking for. And if necessary, consulting a legal or financial professional will allow the process to be overviewed and assured that no unfair terms of agreement are enforced.
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