Owning a dream home is probably the most expensive gift you can give yourself. It is an investment of a lifetime for many people. However, you may not have sufficient fund for purchasing it. A mortgage loan can be the answer to your worries. A mortgage loan is referred to as a loan that can be obtained to fund your dream home as well as the land it stands on. The land and the home are used as collateral. In other words, if you are not able to make payments, the house as well as the land gets confiscated.

Principal amount: You are required to pay interest for the principal amount. Principal amount is the amount of money you actually borrow to buy the house.

Rate of interest: Rate of interest is the amount you have to shell out for using the money. It is usually calculated as a percentage depending on the prevailing economic indicators. The lender charges the rate of interest.

Term of a mortgage loan: The lender allows you to use the money for a stipulated time period which is the term of the mortgage loan. Generally, the term of the loan varies between 15 years and 30 years.

Amortization:The principal amount together with the interest rate makes up your total payment. By the process of amortization, the total amount is divided into equal payments spread over the entire term of the loan. In amortization, the initial payments mainly go towards payment of interest and later it goes towards payment of the principal.

PITI (Principal, interest, tax, insurance):Your payment not only includes the principal amount and the interest but it also includes taxes as well as insurance. You can remember by making use of the acronym PITI, where P is the principal, I is interest, T is for taxes and I stand is Insurance.

Escrow account: If you make a down payment which is less than 20%, you are required to have an escrow account. Making a down payment which is 20% or less is considered a risky affair and lenders urge you to open an escrow account. Your taxes and yearly insurance amount is paid from this account. The lenders later collect it from you on a monthly basis.

PMI or private mortgage insurance: You are also required to include PMI or private mortgage insurance as part of your payment. The PMI is also added to the total monthly payment you are required to make.

Types of mortgages

Fixed-rate mortgage: There are various types of mortgages offered by lenders. The most common type of mortgage is FRM or fixed-rate mortgage. In this type of mortgage, monthly payments and fixed rates are applicable for a period of 15 years and 30 years.

Adjustable-rate mortgage: ARM or adjustable-rate mortgage differs from fixed-rate mortgage. In case of ARM, the rate of interest and the monthly payments fluctuate depending on the conditions of the market.

The adjustable rate mortgage has a lower initial cost and hence can be a borrower’s favorite. However, there is an uncertainty associated with it as it is influenced by external market conditions. However, both have their own advantages and disadvantages.