How to Understand My Mortgage

Mortgage agreements contain essential information about repaying the loan.
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If you are like a lot of other homeowners, you may have no idea what kind of mortgage you have. According to a 2008 Bankrate survey, 26 percent of American homeowners don’t know exactly what their mortgage involves. For starters, it helps to understand three of the major basics of your mortgage loan, particularly when you have questions. You should know how much money you are borrowing, the interest rate you are being charged and how long it will take you to repay the loan.

Step 1

Read each of your loan documents carefully before you sign any paperwork at closing. Ask your lending officer or financial representative for a further explanation if your loan papers contain any information that is confusing to you. Acquaint yourself with the details of your mortgage contract beforehand. You may need to refer back to it at times throughout the duration of your loan if you have questions.

Step 2

Look to see what type of mortgage you have. This will tell you if you are paying a fixed or variable rate of interest on your loan. The amount of interest you pay will not change at any time during the term of the loan if your mortgage has a fixed-rate. However, the interest rate may increase or decrease at certain times during the term of the loan if you took out an adjustable-rate mortgage. Any changes in the interest rate are based on trends in the real estate market.

Step 3

Consider whether the length of the loan will fit into your future financial plans. Among the most popular home loans are 15 and 30 year fixed-rate mortgages, although many lenders also offer loan terms of 10, 20, 25 or even 40 years. Generally, the length of your mortgage depends on how much you can afford to pay each month. Jack Guttentag, mortgage expert and author of “The Mortgage Encyclopedia,” points out that the best mortgage deal often lies in the shortest loan term you can afford.

Step 4

Find the annual percentage rate (APR) for your loan. This information is listed on all loan documents and mortgage statements. The APR tells you the total amount of interest that you will be paying over the course of your loan. Take into consideration any interest that you prepay at closing. Borrowers often pay a loan-origination fee or discount points to get a lower interest rate, which can lower your monthly payment. Interest that you pay upfront decreases the cost of your loan since you will be paying less interest over time.

Step 5

Review your mortgage statements when you receive them. The mortgage statement indicates the name of your lender, customer-service information and loan number. You will need this information if you have questions and must contact the lender. The customer-service information may differ from that on your original loan documents if your lending institution sells your mortgage to another lender. Stay on top of things by always knowing what lender is financing your mortgage.

Step 6

Look over all the financial information printed on your mortgage statement. The statement will show the amount of your monthly payment that is applied to the principal balance of the loan in addition to the amount of interest you paid. If your property taxes and homeowner insurance are in escrow, the statement will show the dollar amount of your monthly payments that is being set aside in an escrow account.

Step 7

Refer to your loan documents if you are planning to pay off your mortgage early or if you intend to make extra payments on your loan. Some lenders charge a prepayment penalty if a loan is paid in full before the end of the term. In that case, your loan documents must clearly state that a fee will be charged, along with the amount or percentage you are required to pay.

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