Home Mortgage

Definition

A mortgage loan or, simply, mortgage is used either by purchasers of real property to raise funds to buy real estate, or alternatively by existing property owners to raise funds for any purpose, while putting a lien on the property being mortgaged. The loan is “secured” on the borrower’s property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning “death pledge” and refers to the pledge ending when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can also be described as “a borrower giving consideration in the form of a collateral for a benefit”.

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Home Ownership by Country

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Home Mortgage

A mortgage loan or simply mortgage is used either by purchasers of real property to raise funds to buy real estate, or alternatively by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. Mortgage borrowers can either be individuals (in the case of mortgaging a home) or a business (in the case of mortgaging a business property be it their own business property, a residential property to let to tenants, or an investment portfolio). The lender of a mortgage loan is typically a financial institution, such as a bank or credit union. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably. The lender’s rights over the secured property take priority over the borrower’s other creditors, which means that if the borrower becomes bankrupt or insolvent, the other creditors will only be repaid the debts owed to them from a sale of the secured property if the mortgage lender is repaid in full first.

How Does a Mortgage Work?

A mortgage consists of two primary elements: the principal (the amount borrowed) and the interest (the percentage the borrower must repay for borrowing the principal). Borrowers pay a mortgage back at regular intervals, usually in the form of a monthly payment. These monthly mortgage payments are typically a combination of both principal and interest charges. Monthly mortgage payments may also include the following:

Property Taxes

The lender may also collect the annual property taxes associated with the home as part of your montly mortgage payment. IN such cases, the money collected for taxes is held in an “escrow” account, which the lender will use to pay your property tax bill when taxes are due.

Homeowners Insurance

Homeowners insurance provides you with protection in the event of a disaster, fire or other accident. In some cases, a lender will collect the premiums for your insurance as part of your monthly mortgage bill, place the money in escrow and make the payments to the insurance provider for you when policy premiums are due.

Mortgage Insurance

Your monthly mortgage payment may also include what is called private mortgage insurance, known as PMI. PMI is required by many conventional mortgage lenders when a buyer’s down payment is less than 20% of the home’s purchase price.

Types of Mortgages

There are several types of mortgages available to consumers. The name of a mortgage typically indicates the way it accrues interest. They include conventional fixed-rate mortgages, which are most common, as well as adjustable-rate mortgages (ARMs), and balloon mortgages. If you’re in the market for a home, research which mortgage option is best.

Fixed Rate Mortgage

The interest rate in a fixed-rate mortgage is agreed upon at the time you close on the purchase and remains the same for the entire duration of the loan. Fixed-rate mortgages are available in up to 30 year terms. This longer period of time in which the borrower has to repay the amount and interest leads to lower monthly payments. For buyers who prefer a stable monthly payment, fixed-rate mortgages are the way to go.

Adjustable Rate Mortgage

In an adjustable-rate mortgage, the interest rate at which the borrower repays may increase or decrease periodically as interest rates change. ARMs are a good idea when their interest rates are particularly low compared to a 30 year fixed rate mortgage. Examples of an adjustable-rate mortgage are a 5 year ARM or 7 year ARM. What this means is that once every five, or seven, years the interest rate is adjusted based a standard financial index, such as the index rate established by the Federal Reserve.

Balloon Mortgage

Balloon Mortgages will start low and then “balloon” over time to a much larger lump sum amount prior the loan expiring. This type of mortgage is aimed at buyers who will have a higher income toward the end of the loan than what they have at the outset of the loan.

FHA Mortgage

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. This loan type is popular with first time homebuyers, requires lower minimum credit scores, and lower, or no, down payment.

VA Mortgage

The VA loan is a loan guaranteed by the U.S. Department of Veterans Affairs the requires little or no money down. It is available to veterans, service members, and eligible military spouses. The loan itself isn’t actually made by the government; but is instead backed by a government agency, which is designed to make lenders feel more comfortable in offering the loan. As a result of this government assurance, lenders often offer these loans without requiring a down payment and with looser credit parameters.

How to Find the Best Home Mortgage> As you shop for a mortgage lender, do your research. Assess you financial health (credit scores, current debt, current and future income, employment, etc), determine which lenders require how much of a down payment, what credit scores are required, and what type of loans they offer. Comparison shop different lenders to find the best home mortgage that fits your needs.

Further Reading