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MORTGAGE TERMS

To buy or sell a home today, it's important to know the vocabulary. Understanding terms like amortization or appreciation can save you time and money; it can also prevent you from obtaining a mortgage ill-suited to your needs.

When you first buy a home you're likely to make a down payment on the property. However, because you financed the purchase, you are now in debt and the lender owns most of the property's value. In traditional mortgages, the monthly payments on the loan are weighted. During the first years, they are largely interest; in time, more of each payment is credited to the loan itself, or the principal.

Gradually, as you pay off principal, you build up equity, or ownership. Your equity also increases if the value of the home increases. This process of gradually obtaining equity and reducing debt through payments of principal and interest is called amortization.

Repaying debt gradually through payments of principal and interest is called amortization. Today's economic climate has given rise to a reverse process called negative amortization. This means that you are losing, not gaining, value, or equity, because your monthly payments may be too low to cover the interest rate agreed upon in the mortgage contract. Instead of paying the full interest costs now, you'll pay them later, either in larger payments or in more payments. You will also be paying interest on that interest.

In other words, the lender postpones collection of the money you owe by increasing the size of your debt. In extreme cases, you may even lose the equity you purchased with your down payment, leaving you in worse financial shape a few years after you purchase your home than when you bought it.

Example. Suppose you signed an adjustable rate mortgage for $50,000 in 1996. The index established your initial rate at 9.15%. It nearly doubled to 17.39% by 1999. If your monthly payments had kept pace with the index, they would have risen from $408 to $722. But because of a payment cap, they stayed at $408. By 1999 your mortgage had swelled from $50,000 to $58,350, even though you had dutifully paid $408 every month for 48 months. In other words, you paid out $20,000 but you were $8,000 more in debt than you were three years earlier. During the next few years despite the fact that the index fell gradually, you were still paying off the increases made to your principal from earlier years.

Certain loans, such as graduated payment mortgages, are structured so that you regain the lost ground with payments that eventually rise high enough to fully pay off your debt. And you may also be able to pay off the extra costs if your home is gaining rapidly in value or if your income is rising fast enough to meet the increased obligation. But if it isn't, you may realize a loss if, for example, you sign a below-market adjustable rate mortgage in January and try to sell the home in August when interest rates are higher. You could end up owing more than you'd make on the sale

How to Chose A Mortgage Thats Right For Me

Francesco Lanni is a Licensed Realtor United Realty Group 227 SOuth Orlando Avenue Suite B-1 Winter Park, FL 32789