There can be different types of loans, and it’s often confusing to know which is the right one that we are looking for. Loans depend on the purpose of borrowing the money; for example, you could require cash for small expenses such as weddings or large expenses such as buying a property.
If you are looking to buy a house or a commercial property, then mortgage loans should be considered. There are many things you need to think about before applying for a loan, and if you are a beginner, you have come to the right place.
Here are all the basics you need to know concerning mortgage loans to get an idea of what you will be dealing with.
What is Mortgage Loan?
Mortgage loans are loans that you apply for if you are considering buying a property. It usually deals with fixed assets such as a house or a property required for business. If you are looking to buy a property but cannot pay the total cost of it, then a mortgage would be helpful for you.
The primary purpose of a mortgage is that the lender will provide you with funds to buy your property, and you need to return that money with monthly installments, including interest over a fixed term. It is a secured loan, meaning the collateral involved will be the property that you have bought.
If you fail to repay the money by chance, the mortgage lender has the right to sell your property and retain the funds. The mortgage also deals with providing you funds against an already existing property.
Common terms regarding Mortgage
There can be few terms that you would come across while dealing with a mortgage. Here we have listed down some of the common terminologies to help you understand better. `
Principal
This is the total amount of funds you would borrow from the mortgage lender or the bank to pay off your property. For example, if the house you want to buy is $300,000, and you take a loan for the same amount, your principal would be $300,000.
Note that principal is just the amount you borrow and not the amount you pay back to the lender. The amount that you pay back consists of the same amount plus interest and other taxes.
Interest and Tenure
The bank or any lender is not going to just give you the money without asking for anything in return. Interest is the amount of extra capital that you have to pay in addition to the money borrowed. Tenure is the time fixed till when the loan has to be paid off.
Usually, an interest rate is fixed beforehand, and a small percentile of the total amount borrowed has to be paid during each installment. Interest is generally low if the fixed tenure to repay the loan is less. The more you extend your due date, the more interest you end up paying.
Taxes and Insurance
Sometimes, property taxes are also included in the mortgage loan that the borrower has to pay since he is the one who owns the house now.
Home insurance and mortgage insurance are some things to keep in mind as they may also be charged along with the repayment for security purposes.
Amortization
This refers to the writing down of the loan payment schedule, that is, how your total payment must be broken down into smaller installments. It notes the amount of real interest paid in addition and the full amount that you would have paid at the end of your tenure.
For example, you took a loan of $300,000 with an interest rate of 3.5% APR and your repayment term is of 30 years. This means that you have to pay $1,347.13 every month in installments for the next 30 years. At the end of your tenure, you would have paid a total of $484,967, out of which $184,967 will be the total interest paid.
Down Payment
It is a certain amount of the total amount that you can pay to the lender in advance. If your down payment is more than 20% of the total amount, then you can get a mortgage at lower interest rates as compared to less or no down payment.
Escrow Account
Most loan lenders establish an escrow account where you have to submit the home insurance and other property taxes so that your lender can pay them off for you. This ensures that the insurance and taxes are being paid off, and if there is a shortfall, the lender will let you know about it.
Types of Mortgage Loan
There are different types of mortgages depending upon interest rates and other factors. Down below are some of the common types.
Fixed-rate Mortgage
This is the most common type of mortgage loan that people apply for. It consists of an interest rate and a repayment term of some years, and both remain fixed throughout. The advantage of it is that the borrower need not have to worry about fluctuations in the payment and just pay the fixed monthly amount.
Fixed-rate mortgages have comparatively high-interest rates and the longer you take to pay off, the more interest you end up paying.
ARM (Adjustable-rate Mortgage)
This mortgage method is becoming popular nowadays as it starts with a low-interest rate. As the name suggests, the interest rates fluctuate in ARM depending upon the market value or other factors. You can opt for ARM if you are sure that your finance may increase in the future to pay off the loan fast.
The disadvantage of ARM is that the interest rates may increase rapidly, and due to the fluctuation, you need to keep in check your monthly installment to be paid.
This concludes all the essential information you would require if you’re thinking of taking a mortgage. We hope that this data proves helpful when you decide to contact your bank or the moneylender. Before accepting an offer, compare and think ahead of time if you would be able to pay off the funds borrowed without any shortcoming.
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