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Discuss mortgage loans in terms of the time value of money and loan amortization. What important points should every homeowner know about how mortgages work? (Hint: Think about taxes and getting the mortgage paid off.)

Answer)

Well, it all has to do with a little thing called “amortization,” which is defined as the reduction of debt by regular payments of interest and principal sufficient to pay off a loan by maturity. In simple terms, it’s the way your mortgage payments are distributed on a monthly basis, detailing how much interest and principal will be paid off each month for the duration of the loan term. Understanding the way your mortgage amortizes is a great way to understand how different loan programs work. And an amortization calculator will show you how your balance is paid off on a monthly or yearly basis. It will also detail how much interest you’ll pay over the life of your loan, assuming you hold it to maturity. In simple terms, a mortgage is a loan in which your house functions as the collateral. The bank or mortgage lender loans you a large chunk of money (typically 80 percent of the price of the home), which you must pay back -- with interest -- over a set period of time. If you fail to pay back the loan, the lender can take your home through a legal process known as foreclosure. For decades, the only type of mortgage available was a fixed-interest loan repaid over 30 years. It offers the stability of regular -- and relatively low -- monthly payments. In the 1980s came adjustable rate mortgages (ARMs), loans with an even lower initial interest rate that adjusts or “resets” every year for the life of the mortgage. At the peak of the recent housing boom, when lenders were trying to squeeze even unqualified borrowers into a mortgage, they began offering “creative” ARMs with shorter reset periods, tantalizingly low “teaser” rates and no limits on rate increases.

Michael Bankers. (2016). Your Bank May Try To Get You To Pay Your Mortgage With 'Points' — Don't. Business Insider

Retrieved from http://www.businessinsider.com/dont-play-points-with-your-mortgage-2013-7

DAN GREEN. (2016). Explaining Mortgage Discount Points In Plain English. The mortgage reports.

Retrieved from http://themortgagereports.com/13644/discount-points-for-mortgages-explained-in-plain-english

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