Mortgage – A Detailed Guide to Mortgage Loans

In order to buy a home, you will need to take out a mortgage. These loans are especially designed to finance such major purchases. They are not much different from consumer loans in the way in which they work, but it certainly pays off to learn about them in detail. After all, you will use such a credit program to purchase the biggest asset you will even own – your house.

What Is a Mortgage?

This is a type of loan designed to finance the purchase of real estate. It can be used by homeowners and by real estate investors as well.

The lender extends a fixed amount of money called the principal to you so that you can buy the house. Usually, the principal is smaller than the purchase price of the property. This is because the home buyer makes a contribution in the form of a down payment.

Your obligation is to repay the principal plus interest. The interest rate is basically the cost of borrowing the money. It is expressed in percentages and is applied to the principle in a compound manner. The entire interest amount and the interest amount paid monthly can be calculated using a specially designed mortgage calculator.

Each mortgage has a term. This is a fixed period of time that you have to repay your debt. Most loans have a term of 15 or 30 years, but lenders tend to be flexible as far as this variable is concerned.

In order to repay your debt, you will have to make monthly payments. Usually, the payment amount is fixed. It has two components the interest amount and the principal amount. As you repay your debt, you gain more equity in the property. What is equity? This is your unencumbered interest in the property. This is the difference between the market value of the house and the outstanding balance on your loan.

A mortgage is a secured loan. It uses collateral. This collateral is your house. In case you default on the repayment of your debt, the lender will have the right to seize your property under specific conditions, of course.

Mortgage Interest Rate

The interest rate is virtually the price that you pay for borrowing money. It is determined on the basis of several factors. There are general factors such as the base interest rate set by the central bank (the Fed in the US), the financial market and the different indexes.

There are individual factors which play an important role as well. The main ones are the borrower’s credit score and credit history. The higher your credit score is the lower the interest will be. A perfect credit history will also lower the cost of the loan. The down payment often plays a role as well. You can expect lower interest if you make bigger down payment.

Types of Mortgages

There are two main types of home loans based on interest. These are fixed rate and adjustable rate ones. Let’s take a closer look at how they work.

What is a fixed mortgage rate? This means that the interest rate on the loan will not change throughout its term. It is fixed upon the extension of the loan. Given that the rate is fixed, the monthly payments will be fixed as well. This gives you certainty and allows for more effective management of your debt with the use of basic tools such as simple mortgage calculator.

An adjustable rate mortgage has interest rate which varies during the term of the loan. Usually, the rate is pegged to an index and follows its movements up or down. Adjustable rate loans typically have lower interest rate compared to their counterparts in the beginning. However, it may grow during the term of the loan. It can go further down as well.

Adjustable rate home loans give you the opportunity to save, but you have to assume a higher level of risk. The monthly payment can go up at any time and remain higher for a considerable period. You have to be able to keep repaying your debt even if things get tougher.

Now you have a general idea about mortgage loans and how you can use and manage one. If you have any specific mortgage questions, you can readily talk to your broker, a bank officer or a financial consultant.

Refinance at
Loan Type

Please enable JavaScript for the best experience.

Facebook Iconfacebook like buttonTwitter Icontwitter follow button