Spanish Mortgage Terms
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Spanish Mortgage Terms

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Wednesday, 29 Oct 2008

Spanish Mortgage Glossary

It can be confusing when you obtain a mortgage in a foreign country, this guide explains some of the usual Spanish Mortgage terms and phrases used. These are some of the main concepts to understand when considering a Spanish mortgage:

Principal

This is the amount of money that the lender will provide to the customer upon granting him or her the loan. The amount of principal provided is subject to two limits:

The home's value: The maximum amount to be financed, that is, the total amount you may receive under a mortgage loan, may be equal to, at most, 100% of the home's appraisal value. In such cases, an additional guarantee must be furnished.
The applicant's income: Loan payments may not exceed 35% or 40% of the applicant's documented cash income. This is to ensure that he or she will not have problems making the payments.

Interest

Interest is the price the customer undertakes to pay the lender in exchange for receiving a given amount of money under a loan. The Annual Percentage Rate (APR) is a formula for comparing the interest rates offered by different lenders. To calculate APR, the payment schedule, nominal interest rate, term and closing costs are taken into account.

Interest period

This is the period of time during which the interest rate for an adjustable-rate loan will remain unchanged. With adjustable-rate loans, it is important to distinguish between:

The initial interest period: The term over which the interest rate agreed in the loan agreement will remain in force.
Adjustable-rate interest period: This period begins upon conclusion of the initial interest period and lasts until the loan has been fully paid off. Over this period, the interest rate will be periodically adjusted (usually on a 6-monthly or yearly basis), as per the terms of the loan agreement.

Payment amount

This is the amount the customer agrees to pay on a regular basis (usually monthly) to the lender that granted him or her the loan as payment on principal plus interest. If the mortgage is an adjustable-rate mortgage, the payment amount will change each time the rate is adjusted. The amount will basically depend on four factors: the principal provided, the term, the applicable interest rate and the payment schedule (usually monthly).

Term

This is the period of time agreed in the mortgage deed for the customer to repay the full amount of the loan to the lender. Generally speaking, it can be set at up to 40 years, depending on:

The type of loan (fixed-rate, fixed payment, mixed, adjustable-rate, etc.).
The applicant's age.
The regulations governing the loan as stated in the agreement (with public housing). With some loans, a grace period, or interest-only period, will apply. The grace period is the period at the start of a loan when the borrower pays only interest, making no payments on principal.

Payment system

This refers to the way in which the loan's principal payments are calculated. There are several types of payment systems, including: fixed payments, decreasing payments and increasing payments. The most common system is the fixed payment system, whereby the borrower always pays the same amount (the sum of principal plus interest) as long as the interest rate remains unchanged.