If you're planning to refinance your mortgage, you should first understand the basics of mortgage loans, especially when it comes to interest rates and principal balance. Mortgage loans are simply an agreement between you and a mortgagee. Both the principal and the interest are the underlying assets when you take out a mortgage loan. So, mortgage loans are really just loans for the promise to pay back the principal. Key Takeaways. The two most important parts of any mortgage loan are interest, which are actually the loan itself, and principal, which are usually the original loan amount, click here for more info. The U.S. federal government doesn't operate as a direct mortgage lender, however, it does insure certain kinds of mortgage loans through the Department of Veteran's Affairs and the Federal Housing Administration. While the federal government doesn't operate as a lender directly, it still guarantees certain mortgages by either issuing a note or by placing a lien on the property involved. To simplify things, when you refinance mortgage loans, you refinance the existing loan and include the new payment in the principal amount. So, when it comes time to calculate your payments, you only need to subtract the amount of your new repayment from the current mortgage amount. This way, you only pay interest on the amount of interest you have paid or to buy groceries each month, rather than adding up principal payments to calculate your principal loan balance. Of course, you could do it the other way around - just subtract the amount of your principal loan from your monthly mortgage payments and then add the mortgage payment to your principal loan balance. There are pros and cons to both methods, so be sure to weigh them carefully before making your final decision. Many people don't know that the term mortgage loans refer to a legal agreement between the mortgagee (borrower) and the lender. Borrowers agree to pay a lump sum, in cash, to the lender, who promises to pay the borrower an equal amount of money at a later date in return for a promise to repay the loan. The term mortgage is used because when loans are made, they are usually made on a "word of credit" basis. In other words, the lender doesn't just give out a bunch of credit cards and tell the borrower to spend the money like he or she would on a credit card. Instead, the lender makes a promise to pay the borrower the money it's asking for in a specific amount of time, which can only be accomplished if the borrowers can somehow prove that they have the funds to repay the debt in a specified amount of time. The term amortization is another term often used when people talk about mortgage loans. Amortization is a calculation that determines how much of a monthly payment a borrower can afford based on the total principal and interest that are already owed. The calculation is based on the principle, interest rate, the amount of the outstanding principle, the remaining balance, and amortization, the amount of change to the principal each month. For example, if the remaining amount on the principal is twenty dollars, and the remaining principle is still ten dollars, the amount the borrower will pay over time is simply the amount of the remaining percentage over the term of the mortgage. To make things simpler, let us assume that the mortgage loans are actually grants from the U.S. federal government to the borrowers. When the grant is granted, the lender pays the principal amount on a monthly basis. However, the loan amount increases each year based on inflation and the number of years the grant is in effect. Since the federal government supplies the money, interest rates and loan amounts stay relatively similar to those in private lending practices. Therefore, a new loan may actually reduce the principal amount of the grant. Nevertheless, the lender must report the principal amount as a taxable income to the federal government, just as the borrower must report any income gains or losses on personal tax returns, view here for more details. To understand more about this subject, please read a related post here: https://en.wikipedia.org/wiki/Home_equity_loan.
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