A mortgage, to define in one line, is a kind of a loan that is availed by the borrower in order to purchase a home / or maintain a home, or any other form of real estate. A mortgage loan is paid back over a pre-decided period of time and the lender gets to keep the property as collateral or loan security.
What Is A Mortgage In Simple Words?
To understand mortgage in simpler terms, let’s take an example. Let’s say that Mr A needs to buy a house or any other type of real estate but does not have enough funds to be able to purchase it. Mr A, hence, decided to go to a bank and ask them for a mortgage. Mr A can then take the money offered as a mortgage loan by the bank and buy a house from that money. Against the mortgage offered by the bank, the bank charges interest and keeps property papers or property credentials with them until the loan is fully repaid by Mr A.
It must be noted here that since the property is used as collateral against the loan, a mortgage loan is categorized as a secured loan. Mortgages are available at a variety of rates, including fixed-rate and adjustable-rate.
What is Mortgage Process?
Mortgage opens up a path for business owners as well as individuals to own a house without having to pay an upfront price on the property. A mortgage is highly preferred by most property seekers because it gives them a good amount of time, typically a couple of years, to be able to repay the loan. The lender also benefits on the flip side because they not only get the interest on the loaned amount but also, the property as collateral until the entire capital + interest is repaid by the borrower. A mortgage is also known as “liens against property.”
- The borrower applies for a loan with a lender
- The lender clocks in proof that the borrower can repay the loan; this could be anything, from income statements to other forms of collateral like gold
- The lender runs a credit score/ CIBIL score check
- If everything looks fine, the lender then approves the loan and an interest rate is decided
What Are The Types of Mortgages?
Mortgage comes in many forms. Here are some types of mortgages-
1. Simple mortgage/ Traditional Mortgage/ Fixed Rate Mortgage
A mortgage wherein the borrower mortgages the immovable property, to avail of a loan. The lender gets to keep the property documents as collateral and has the legal authority to sell the property or the mortgaged asset of the borrower defaults the payment.
Most simple mortgages are 30-year and 15-year fixed-rate mortgages; while some few may also be for terms as short as five years.
2. English mortgage
In an English mortgage, personal liability is established on the borrower. This means that the mortgaged property itself is transferred to the name of the lender; with a condition that it will be named back to the borrower once the mortgage repayment is closed.
3. Usufructuary mortgage
In a usufructuary mortgage, the property is transferred to the lender, and the lender is allowed to receive rent/ profit from the property, however, the lender is not allowed to create personal liability on the borrower.
4. Reverse mortgage
Under a reverse mortgage, homeowners over 62 years of age are allowed to convert part of the equity in their homes into cash, without any monthly mortgage payments. The money is received by the homeowners either as a lump sum amount, a fixed amount, or a line of credit.
5. Adjustable-rate mortgage
In an adjustable-rate mortgage, the interest rate is pre-decided but only for an ‘initial term,’ which is v and makes a property much more affordable. Once the said initial term is over, the applicable interest rate changes to the prevailing interest rates. It must be noted that most ARM’s or adjustable-rate mortgages have a maximum limit or a cap on how much the interest rate can be increased in order to protect the interests of the borrowers.
How to Choose A Mortgage?
A mortgage was traditionally offered only by banks, savings associations, loan associations, and credit unions. In today’s day, however, mortgages have evolved and one can now avail it even via multiple non-banking lenders which makes it so difficult to pick the right mortgage from a pool of potential options.
If you’re planning to take a mortgage, here are some things to keep in mind that can be of help to compare and get yourself the best mortgage of all:
- Use an online mortgage calculator: An online mortgage calculator can come in handy to estimate your overall capability. It not only helps estimate the monthly payments but also the probable interest rate and the kind of down payment you can afford.
- Be prepared for additional costs: While you may believe that you will only be repaying the principal and interest amount, you need to be prepared for more. Your lender may additionally want you to pay for other expenses like local property taxes, homeowners insurance premiums, etc. These expenses are typically added to the monthly repayment account.