There are
many stresses associated with home buying – both financial and emotional. And
frankly speaking, it doesn’t help that the process comes with its very own
foreign language. While your mortgage broker can help de-mystify these terms,
it helps to have a bit of a primer on what some of these terms mean. After all,
it’s your money and your home we’re talking about; as a Mortgagor, you have a right to understand what you’re reading. (You
didn’t know you were a mortgagor? Read on…)
We’ll start
with “Amortization” and “Term”. Both
refer to periods of time in the life of your mortgage, and you’ll want to be
sure that you understand the difference.
The “amortization” of your mortgage is the
length of time that would be required to reduce your mortgage debt to zero,
based on regular payments at a specified interest rate. The amortization period
is typically 15, 20 or even 25 years, although it can be any number of years or
part-years. You could establish that you are able to make a certain payment
each month of say $950 for your $130,000 mortgage at 5.5%. In this case, your
amortization period will be just under 18 years. Or you could tell your broker
that you’d like to be mortgage-free in just 10 years. With an amortization
period of 10 years at the same interest rate, your $130,000 mortgage will cost
you about $1,407 per month. That’s a tougher monthly payment, but you would
save thousands of dollars in interest. (More than $35,000, in
fact.) As you arrange your mortgage, then, keep in mind that your
amortization period may be fairly long -- although the shorter you can make it,
the less you’ll wind up paying for your home in the long term.
The “term” of your mortgage will typically be
shorter. The “term” is the duration of your mortgage agreement, at your agreed
interest rate. This will be a very specific length of time, although you will
have several choices. A 6-month mortgage is a very short-term mortgage. A
10-year mortgage will be one of the longest terms, generally with a higher rate
of interest to represent the higher degree of uncertainty in the economic
outlook. After your mortgage term expires, you will need to either pay off the
balance of the mortgage principal, or negotiate a new mortgage at whatever
rates are available at that time.
Now, back to the term “Mortgagor”. This is one of three
very similar terms: “Mortgagee”, “Mortgagor”, and “Mortgage”. A Mortgagee is the lender of the money: a
bank, company, or individual. A Mortgagor is the borrower: the person
or persons (or company) that is borrowing the money, and who will pay it back
to the mortgagee. The Mortgage, of course, is the legal
document that pledges the property as a security for the debt.
Still
confused? Speak with a mortgage professional. Get the best mortgage
suited to your needs and all your questions answered in plain talk.
Nitesh Kumar is a Mortgage
Consultant with Mortgage Intelligence.