Mortgage Guide: Everything You Need to Know
What is a mortgage?
We have heard the word mortgage many a time, especially when buying something expensive or big like real estate. So there are many things we want to know about mortgage loans, like what exactly it is, how it works, what its types are, why it is needed, etc.
The following guide will provide all the necessary details regarding the mortgages.
In simple language mortgage is a type of loan used to buy a home, also referred to as a mortgage loan. It is an agreement where a bank or a financial institution lends you the money at interest in exchange for the title of your property. By definition, you may get that the collateral for the mortgage is the home itself.
How does a mortgage work?
The process of taking out the mortgage loan is a long one, which usually runs for 15, 20, or 30 years depending upon the amount and plans you receive from the bank. It takes a lot of time to clear the debt as you need to pay both the amount you borrowed and the interest on the loan. The mortgage will be paid at regular intervals in monthly payments. You will become the property owner only after completing the full instalments.
What is included in a mortgage payment?
Most people have mistaken that they only need to pay the amount they borrowed and the interest, but the actual mortgage payment consists of 4 main components that are:
Principal
It is a specific amount that has been borrowed from the lender to purchase a home.
Interest
It is an additional amount expressed as a percentage rate that has been charged on the borrowed money you get from the lender.
Tax
The state government applies property taxes on home purchases. Your lender will collect this tax as a part of your monthly mortgage payment.
Insurance
Insurance is the Security money that provides you the sense of protection against any damage caused to your property by some natural event or a disaster.
Why do people need mortgages?
Mortgage loans are needed to buy something expensive, as common households don't have sufficient money to finance a home. Mortgages allow the individual to purchase his dream home with a relatively small down payment. Thus without bearing much burden of paying massive amounts altogether, one can pay small instalments monthly and become the property owner soon.
Who can get a mortgage?
Various factors determine your eligibility to get a mortgage loan. In general, you are qualified for the mortgage if you are aged between 25 and 40; you should have a larger than average income, a sufficient amount of savings for the deposit, and a healthy credit rating. Though not all people who want a loan can match up perfectly with the following criteria, banks or financial institutions provide many schemes and offers for such people.
Types of mortgages
There are many types of mortgage loans available in the market. But the most common types are fixed-rate mortgages. The tenure for these loans can be from 5 years to 40 years or longer. Stretching payments for more years can reduce the monthly payment, but it increases the total amount of interest paid on the borrowed money.
There are numerous kinds of mortgages depending on the length, structure, available schemes, and various other factors. Let us see a few examples of the most popular mortgage loans available to the borrower.
Fixed-rate mortgages
As the name fixed-rate defines the term itself, in these types of mortgage loans, the interest rate remains the same for the entire loan period, which means the borrower pays the fixed interest throughout the loan is covered. It is also known as a traditional mortgage.
Adjustable-rate mortgage
In these mortgage loans, the interest rate is fixed only for an initial term, but it changes periodically based on prevailing interest rates. Such loans are beneficial only when taken for a short term.
Interest-only loans
These loans are less common due to their complex repayment schedules and are usually taken by sophisticated borrowers only. In these loans, the borrower only pays the interest for some or all the terms without altering the principal balance during the interest-only period.
From where can you get the mortgage?
There are various options from where you can get the mortgage loan. Usually, the banks and credit unions provide you with a home loan. Also, some specialized mortgage companies only deal with loans on real estate.
What is the minimum down payment required for a mortgage loan?
Every financial institution or bank has there own criteria in setting up the rules for the down payment, but mostly the lender demands at least 20% of the property you purchase as the down payment. Many other banks offer even less than 20% for the down payment.
What is the difference between a mortgage and a loan?
The simplest difference is that a loan is the total amount of money borrowed from a bank to meet various requirements. It can be collateral-free or secured, whereas mortgage refers to the immovable property used as collateral to avail a loan.
What are the benefits of having a mortgage?
Mortgages provide a lot of benefits for a borrower. The best thing about having a mortgage is that you don't need to bear the burden of providing a lot of cash at once.
The few advantages of mortgages are.
Purchase your dream home without cash.
Helps to keep your cash reserve.
The interest is text deductible.
Conclusion
Mortgage loans are essential nowadays as not many people hold a lot of savings with them. It becomes difficult for a person to arrange a big amount of money at once; thus, these mortgages help them fulfil their dream of buying a home by providing money on interest. So it becomes easier for a borrower to clear his debt in monthly instalments rather than paying altogether.