The idea of a loan is simple:  You lend me money to buy something I need, and I pay you back over time plus interest. 

Unfortunately, understanding all the financial terms that go into buying a home is frustrating and confusing, especially for first-time homebuyers. At Modern Day Lending, we change all of that. Let's start by breaking down the loan structure, the foundation upon which your loan is built.  

TLDR Key Takeaways

• The Loan structure comprises the loan term, the interest rate, any collateral involved and repayment terms.
•  The loan structure protects the lender from losses in cases where the borrower cannot repay the debt and meet the borrower's need for financing. 
• Loan structures, done correctly, are the best of both worlds for borrowers and lenders and help save time and money. 

How a Loan Structure Works

Master the Art of Borrowing with These Helpful Definitions and Key Terms

What is Loan Structure

A loan's structure defines the individual parts of a loan, including what it's for, how much, what type of loan it is, what the interest rate will be, and the repayment terms. It also details how the borrower will repay the money. A well-structured loan protects the lender in the case of non-payment and gives the borrower an outline of the terms they agree to.

The actual makeup of the loan structure depends on the borrower's risk profile (for example, how good or how poor their credit score is), the repayment period, and much more. A loan's structure is only approved when both parties agree to the terms. 

The loan structure is made up of the following parts: 

• The loan type (adjustable or fixed)
• The product itself (conventional loan, government loan, jumbo loan)
• The amount of the loan
• The term of the loan
• Closing costs
• Any collateral involved
• The interest rate of the loan and
• The repayment schedule 

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These points paint a picture of how your mortgage looks; thus, it's known as your loan structure. 

What Are the Components of Loan Structure?

A loan structure consists of the following components: 

Loan Amount (Principal)

The loan amount, also called the principal, is the money you borrow from the lender to buy a home. 

Interest Rate

The interest rate is the percentage you pay to the lender in exchange for borrowing from them. How much you'll pay in interest depends on several things, including:

• The total amount you borrow
• The length of the repayment term
• The type of loan product
• Your financial profile (such as your credit score)
• Any collateral you intend to include as security

Loan Term

The loan term is the time between your loan repayment begins and the date of your last mortgage payment, known as the maturity date. 

Collateral

This is an asset (or many assets) that you, the borrower, put up as security for the loan, in essence, to demonstrate that you intend to pay back the loan. These can be cars, savings bonds, stocks, or anything else of considerable value. If you default on the loan, these assets become the lender's property. 

Repayment 

These periodic payments include both the loan principal and the interest rate over the loan term. A portion of each payment you make will go toward the principal and the interest, although how much of each one depends on the type of loan you have. 

Loan Structure Examples

The following example from Investopedia, shows the amortization schedule of a $100,000 30-year mortgage. An amortization schedule is essentially a breakdown of how much of your payment will go to the principal and how much will go to the interest. The chart below shows the majority of the first years' payments going toward interest, with more and more going to the principal over time.

An example of an amortization schedule for a mortgage loan (Source: Investopedia)

Different types of loan products are structured differently. For example, with a fixed-rate mortgage, the most popular type of loan structure,  the interest rate doesn’t change over the life of the loan. With an adjustable-rate mortgage, the interest rate is fixed for a certain time period (and is usually lower than a conventional mortgage rate) but then rises after that period ends. You’ll see adjustable rate mortgages with names like 5/1, which means that the interest rate is fixed for the first five years of the loan and then changes every year thereafter. 

Even though you hear about fixed-rate and adjustable-rate mortgages the most, there are several other types of loans out there, including jumbo loans, piggyback loans, asset-based loans and more. We invite you to learn more about the many different types of loan programs we offer here at Modern Day Lending to help you decide on an option that could be right for you. 

Explore Your Mortgage Options with MDL

If you’re an entrepreneur, freelancer, investor or other professional who doesn’t show enough income on your tax returns, or who have been denied because of income fluctuations, Modern Day Lending can help. Everything we do is centered around helping those individuals with non-traditional incomes get qualified and approved for a home loan. We operate in all 50 states and are committed to helping you find the right product for your needs. Contact us today and let’s work together to build a loan structure that can help you live your dream of homeownership!Loan Structure - Overview & Examples | Glossary