What Is a Mortgage?
A Mortgage is usually a deal where a loan is granted on a condition that if the loan is not repaid within the stipulated time-line, the asset kept as security can be taken over by the bank/creditor. Usually under mortgage deals most of the times the secured asset would be buildings, estates etc. In a few cases mortgage loans are issued to businesses that are with low credit rating also, with an intention to take over in the future.
What to Look for Before We Finalize on the Mortgage Loan
There are couples of interesting points which are key for any person to understand and verify thoroughly before concluding on the mortgage loan and the institution from whom it should be taken. Usually banks will give loans basing on the value of the property and person's credit worthiness (usually proven with the salary statements and bank statements).
Loan Amount
This is a key factor of a mortgage loan other than the property that you want to buy. Basing on the building value, your income and credit score the loan amount will be decided. So the loan amount will be total asset value - the down payment you are ready with. This will again be scrutinized against your income and credit score.
Interest Rate
Usually in case of mortgage loans against a new house, the initial interest rates are low, but will increase further basing on the index plus the margin.
Loan Term
This is yet another interesting and crucial element of mortgage loan. If you choose to keep the tenure short, you will eventually end up paying a comparatively less interest. Ex: your total loan amount is $28,000 at an interest rate of 15% and with interest it is $32,200. If your monthly payment is 575$ and the interest portion is of $75, and the total tenure is 56 months. If you make the total loan payment within 36 months at a monthly payment of $778, eventually you will end up paying $2,700 (in 36 months) as interest in place of $4200 for 56 months.
Pre-Closure Charges
Various institutions follow different costs if the customer is closing the loan than the agreed tenure of loan.
Type of Loan
This is the most catchy part of any mortgage loan. What happens is banks will offer you 2 types of loans one is fixed interest rate, where the interest rate is slightly higher than the adjustable rate mortgages (arm), but these are most likely the same amount that you pay each month. This involves less fluctuation in terms of interest rate and there by the monthly payment. However, the other type loan is the arm where the initial monthly payment may be low for some time but then it is very much variant subject to changes in market. Having said that, each time there is a change in interest rate and monthly amount the customer will be given a flexibility to increase the tenure if he is not able to pay the monthly amount to the extent of hike that had taken place due to change in interest rate. This is an advantage compared to fixed price loans. Having said that, these loans are riskier compared to fixed rate, because these not constant.
So, no matter what type of loan that you go for, it's very important you understand the advantages and disadvantages clearly and also that the banks understands your true credit score.
