Mortgages: Periodic Caps, Recourse Loans, and Mortgage Life Insurance
If you are looking to buy your first home or move up in the market, financing is going to be an issue you have to address. Following are some plain English explanations of terms used in the industry.
When seeking out financing for your new purchase, half the battle seems to be understanding the terminology used in the mortgage industry. While a good bit of it is straightforward, there is also a collection of terms that are a bit cloudy to say the least. With that in mind, here are some terms that need to be flushed out just a bit.
The periodic cap on a loan is an area where people can get confused. A period cap is an element of an adjustable rate mortgage. It refers to the amount of movement the interest rate on the loan can be adjusted by the lender within a defined period of time. The exact nature of the cap for your loan is dependent upon the language in the borrowing agreement. The periodic cap may call out for an increase or decrease of one percent each six months, but the specifications are highly dependent upon what you agreed to at the outset of the loan. Obviously, this means you should be taking a close look at the cap language when applying for a loan.
A second set of terminology that is critical to borrowers, but which few understand, is the designation of the loan as a recourse or non-recourse loan. A recourse loan allows a lender to take back the property if you default and pursue you personally for any money owed that is not covered by the value of the home. A non-recourse loans forces the lender to stick to just the home and eat any additional losses. Obviously, you want a non-recourse loan whenever possible. Fortunately, many states designate that all home loans are non-recourse as a matter of law, but make sure to check up on this issue in yours.
Mortgage life insurance is an area where a borrower can be taken for a ride. This insurance is purchased as security for the repayment of the loan. Essentially, you buy life insurance that pays off the mortgage in the event of your death. This may sound smart at first, but mortgage life insurance is expensive. You are far better off obtaining a traditional insurance policy to cover debts should you pass away as they are much cheaper than mortgage life insurance.
At the end of the day, these three areas of the mortgage process prove one indisputable thing. It is wise to closely read your borrowing agreement and understand the terminology.
Raynor James is with the site - FSBOAmerica.org - mortgage loans for your home purchase.
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