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Clearing Up The Confusion Of Loan Terms

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Published on June 29, 2020
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Signing your loan documents can be an intimidating endeavor, especially if you’re unfamiliar with the jargon. After all, financial terminology can be confusing.

There are many phrases that sound extremely similar but actually have nuanced meanings. The phrase, loan terms, is a prime example of the kind of confusion that can arise because it’s often used to refer to multiple aspects of your mortgage.

If you’re feeling overwhelmed with confusion, don’t worry. We’re here to help clear things up. Read this article to learn what loan terms, term loans and terms and conditions are and how they differ from one another.

What Are Loan Terms? 

The fact that the phrase, loan terms, is verbiage often used as umbrella language is the reason so much confusion exists. Loan term is just the lingo used to describe the broad aspects of your mortgage. Therefore, depending on the context, it may refer to the life span of your loan or the terms and conditions involved in borrowing funds.

We will describe the difference between these references in the sections below. However, if you’re ever uncertain about anything regarding your mortgage, it’s best to ask your lender to clarify. 

What Is A Term Loan? 

A term loan is a loan that is to be repaid during a fixed period of time, which is typically measured in years when describing a mortgage – or months when in reference to an auto loan. If payments are made on time, according to the loan agreement, the funds are repaid within the specified time frame.

The length, or term, of a loan is negotiated between the lender and borrower. While the most common terms are 15 and 30 years, the term can be any number of years as long as it’s agreed to by both parties.

Why Is The Term Of The Loan Important? 

The length of the term, or how much time the borrower has to repay the loan, has a huge impact on a mortgage’s affordability. The term determines not only how long the borrower will be in debt but also how high the borrower’s monthly payments and overall loan costs will be.

In general, shorter terms translate into higher monthly mortgage payments. But longer terms lead to higher costs over the life of the loan.

A borrower who chooses a 15-year fixed-rate mortgage may have to spend more money to pay off their principal and interest each month. However, by the time their loan matures, they’ll ultimately have spent less on interest.

On the other hand, a borrower who obtains a 30-year fixed-rate mortgage may have access to more spending money since their monthly payments are lower. Yet, over time, they pay more for the privilege of borrowing funds.

Let’s take a closer look at how the term a borrower chooses affects both their monthly mortgage payments and their total interest costs. 

Term

Monthly Mortgage Payment

Total Interest Costs

15-Year

$3,698.44

$165,719.13

20-Year

$3,029.90

$227,176.40

25-Year

$2,639.18

$291,755.26

30-Year

$2,387.08

$359,347.53

Note: The information on this chart is based on a conventional fixed-rate mortgage for a $500,000 loan with an interest rate of 4%.

So although you’d save $1,311.36 a month by selecting a 30-year mortgage instead of a 15-year, you’d still be paying an extra $193,628.40 more in interest over the course of the loan.

Therefore, when choosing the term of your loan, you have to decide if you want to make smaller monthly payments or spend less on your mortgage over the long run. As you make the decision, you should be sure to compare both the interest rate and annual percentage rate for each term you’re considering. Comparing these rates will help you gain a better understanding of the true cost of your loan options.

What Are A Loan’s Terms And Conditions?

The terms and conditions of a loan are the provisions that are agreed to by the lender and borrower. These provisions, which are provided to the borrower in the loan contract or mortgage note, describe the characteristics of the loan, as well as the rights and responsibilities of the parties involved. Therefore, the loan’s terms and conditions specify the amount of money loaned, the interest rate charged and the timing and cost of monthly payments.

The terms and conditions also outline fees and penalties associated with the loan. They’ll disclose the fees you’ll incur if you make a late payment and potentially indicate how long of a grace period you’ll be given before you’re charged a late fee. The terms will also establish whether you’ll be charged any prepayment penalties for making extra payments or paying off your mortgage ahead of schedule.

Overall, the loan’s terms and conditions will provide you with insight as to what you should expect when taking out a loan. As a result, you must take the time to read through them before signing on the dotted line.

Summary: We’re Here To Help Clear Up Confusion 

Don’t let a little jargon get in the way of understanding your loan documents. Remember that loan terms is just a phrase often used to address the overarching aspects of your mortgage.

You may hear the phrase used to discuss the term of your loan, that is – the length of time you have to repay the borrowed funds – or the terms and conditions associated with borrowing them. Your terms and conditions will tell you all you need to know about the ins and outs of your mortgage, so you’re fully aware of what you’re agreeing to when you sign your contract.

Purchasing a home and obtaining a mortgage are complex processes, and it’s natural to be confused by them. If you have any more questions or concerns regarding loans, we’re here to help clear up any confusion you may have.

To get further insight into the process, explore more mortgage-related articles in our Learning Center, or speak to a Home Loan Expert to learn more about your options.

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