Mortgage Payment, Fixed Mortgage: What Does It All Mean?

Mortgage Payment, Fixed Mortgage: What Does It All Mean?

If you’ve got a ton of cash, you can buy a house or an apartment outright. Most of us, though, need to borrow money, which means we need a mortgage loan.

The word “loan” is actually central to understanding how the mortgage transaction works. What happens when you buy a property is two-fold. One is that you borrow money from the bank to pay for the house, and the second is that you pledge to the bank that, if you don’t pay the money back, they can come after you.

The Penalties For Not Paying Your Mortgage Varies By State

The extent of that second pledge varies from state to state. In Arizona, for example, if you don’t pay back your mortgage loan, the bank can foreclosure on your property and take the house or apartment back. But, that’s all the bank can do to you. In most states, though (for example, New Jersey) you can be personally liable. If you owe the bank $300,000, and they foreclose on your $250,000 house, you still owe $50,000!

This Explains A Lot About The Housing Slump

This fact explains why more Americans didn’t walk away from their homes in the housing slump. For many, even putting their houses or apartments into foreclosure wouldn’t have erased their debts to the bank.

Most Of The Terms You’ll Negotiate With The Bank Are About Repayment

The amount of time you take to repay the bank is one common element: You may hear your friends talking about their “30-year mortgage” or their “15-year mortgage.” The second is the interest rate, which can be fixed or adjustable. Adjustable rate mortgages can go both up and down, so they were blamed for a lot of the housing slump, but they’re a good financial choice for some buyers (more on that later). For now, realize that if you don’t hear any differently, a mortgage is assumed to be fixed. A “5% 30-year” is assumed to be a “5% 30-year fixed.” If it’s adjustable, then its name usually tells you when it resets: So, a “5/1” is a mortgage that is fixed for the first 5 years, and then resets once a year, every year after.

A Bank Can Transfer The Right To Collect Your Loan

This means that now you owe a different party for your loan. Many of the big banks like Citi and Wachovia transfer or resell some of the mortgage loans they make. Banks that don’t (this will include some smaller local banks) are called portfolio lenders. That’s a term worth knowing because sometimes portfolio lenders offer the best interest rates.

Often Overlooked: You Pay After You’ve Enjoyed The Property

After all, you have the house first and then continue to repay a loan. This is backwards from the way rent works, so it often causes confusion in first-time homebuyers. Let’s say we have two houses side-by-side: Ms. Green rents one, and Ms. Blue buys the other. Even if they both move in on the same day – say, September first – they send their checks in at different times. Ms. Green sends in her June rent on June first because she pays for the month in advance. Ms. Blue, however, pays her June mortgage on July first because she’s paying back the part of the loan she used during June.


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