Fri 17 Oct 2008
“How High Is The Ceiling?” A Basic Explanation of Mortgage Terms
Posted by Roger under getting a mortgage
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When your peers or co-workers talk about mortgages, do you feel as if they’re speaking a different language? When they casually say words like “encumbrance” do you imagine carrying a physical burden? If they bemoan a high “ceiling,” do you wonder if they’re complaining about cleaning the upper part of their rooms? Well, fear these conversations no more, because the task of knowing a basic explanation of mortgage terms should not be that hard.
First of all, what is a “mortgage”? The dictionary defines it as a “temporary, conditional pledge of property to a creditor as security for performance of an obligation or repayment of a debt.” Simply put, a mortgage is property that is placed by the borrower when he wants to assure the lender that that he will be paid back. It is used to ensure security. It is somewhat similar to a “Deed of Trust” used in many western states.
For example, let us assume I am the “mortgage lender” or the “mortgagee”, and you are the “borrower” or the “mortgagor”. If you want to borrow a sum of money (“a mortgage loan”) from me, you can offer your car as mortgage. Now, if you do not pay me back by the time we agreed upon, I can claim your car as property. This process is called “foreclosure”. If you do pay me back by giving a “mortgage payment”, you get your property back.
There are several other words you should be familiar with related to “mortgage payment”. The primary one is “amortization”, which is the method of repayment of the amount borrowed, usually through regular monthly payments of “principal” and “interest”, which compose the “mortgage payment”. The “principal” is the original amount that you borrowed, while the “interest” is the cost of borrowing the principal amount. The other two terms are the familiar words “taxes” and “insurance.” All together, these terms are called the “PITI payment”: principal, interest, taxes and insurance. You can use a home mortgage payment calculator to determine exactly what your payment will be.
In terms of payment, there are two types of mortgages: “fixed” and “adjustable”. A “fixed mortgage” uses a fixed interest rate and a fixed length of time to pay back (“term”). This is fixed at the start of the mortgage, and cannot be changed. The “adjustable mortgage”, also called the “adjustable rate mortgage”, has an interest rate that will change up or down according to current interest rate levels. Now, the perplexing usage of the word “ceiling” comes in. A “ceiling” is the maximum allowable interest rate over the life of the loan of an adjustable rate mortgage.
There might also be some issues regarding the transferring of a mortgage or a property. One of the key problems is the issue of an “encumbrance” which is a claim against a property by another party. This may negatively affect the ability to transfer ownership of the said property. A concrete example would be a full-grown, independent man mortgaging his parents’ house, without his parents’ consent, in order to borrow money. Since the son does not legally own the house, there is an “encumbrance”.
You have been armed with the basic lingo used in mortgage talk. If asked, “How high is the ceiling?” you now can respond with a sensible (but less amusing!) answer.