Understanding mortgage terminology
Many homeowners who lost their homes in the 2008 mortgage crisis did not fully comprehend the mortgages they obtained. They weren’t entirely to blame because uninformed brokers and salespeople—who were almost always men—sold them contracts they didn’t fully comprehend.
As with everything else, if you visit a broker to talk about getting a mortgage and have done your homework, it will be impossible for the broker to take advantage of you. These are the basics:
One kind of loan is a mortgage. For a plot of land or other property, a loan is being made. The land or property acts as “security” or “collateral” for the loan. The asset backing a mortgage is what makes a mortgage different to a regular, “unsecured” loan. Regular loans are riskier for banks because they lack security.
A mortgage for a home is called a “residential mortgage“; a mortgage for offices, factories and other commercial properties is called a “commercial mortgage“.
The “term” or “maturity” of the mortgage is the number of years over which you are borrowing the money. Normally, the mortgage will be fully repaid at the end of the term.
Your mortgage has a “principal value“. The amount of the mortgage is the principal value. It is the sum that you borrow. Usually, the principal value will be less than the land’s or the property’s worth.
Since they stand to lose money if the value of the property drops and you stop making mortgage payments, banks are typically reluctant to lend you an amount equal to or higher than the value of the property. For them, it would be too dangerous.
If you find a piece of real estate with a value of 100,000 and the bank decides it can lend you 75,000 towards buying that property then the “loan-to-value” would be 75%. Loan-to-value (LTV) is a crucial mortgage term and a crucial concept.
LTVs of over 100% were fairly common prior to the 2008 credit crisis. Although it was quite normal at the time, it sounds insane now.
You will pay more interest on that mortgage the higher the LTV.
The expense of a mortgage is interest.
If your mortgage has a “fixed” interest rate, you will pay the same amount in mortgage payments every month. However, keep in mind that for the first few years, the majority of your payments will only go toward interest, with little left over going toward paying back the loan.
