What Is Included in a Mortgage Contract?

A mortgage contract explains the details of your home loan.

A mortgage contract explains the details of your home loan.

Before you buy a home with a mortgage, it is crucial that you understand the terms of your mortgage contract. A mortgage contract is the loan document between you and your financial institution. It will clearly spell out your responsibilities as a borrower and the requirements to fulfill the contract. Be sure to closely review your mortgage documents so you don't get any nasty surprises.

Interest Rate

Your mortgage payment is divided between two parts. Part of the payment pays off your remaining home loan principal balance and the other part is interest on the loan. The higher your mortgage interest rate, the harder it will be to pay off your mortgage balance. This is because less money per payment is being used to reduce your mortgage balance. Before agreeing to a mortgage, you should double check the interest rate listed on your mortgage contract. Make sure that it matches the rate quoted by your financial institution. Signing a mortgage contract with a higher than expected interest rate is a costly mistake.

Fixed or Adjustable Rate

After you've confirmed your interest rate, you should also review whether the interest rate is fixed or adjustable during the mortgage. This should be clearly listed in the mortgage contract. A fixed rate stays the same for the life of your mortgage. An adjustable rate can change after a certain period causing your mortgage payments to change as well. If you are taking out an adjustable rate mortgage, the mortgage contract should also explain when the interest rate can change, how often it can change and the maximum possible increase in the interest rate.

Prepayment Penalties

Your mortgage contract also lists whether your loan has any prepayment penalties. Financial institutions expect to make a certain amount of profit on your loan through interest payments. If you pay off your loan early, either through refinancing or a lump-sum payment, your mortgage company may charge a penalty to offset its lost income. Prepayment penalties are typically charged if you pay off your loan within its first three to five years and can be several thousand dollars. Review your contract to see if you have a prepayment penalty as well as the terms of any penalty.

Amortization

Mortgage contracts also include a section explaining whether your loan is fully-amortizing or not. A fully amortized loan is completely paid off at the end of your contract. If you loan is not fully amortizing, you will still owe money at the end of the contract. You'll need to pay off this remaining balance with a lump-sum payment or through a refinance. Review your contract's amortization plan so you can be prepared in case you still owe a balance at the end of your mortgage.

About the Author

David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.

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