What Are Mortgages?

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By Adrian Cruce

Mortgages are very important debt instruments that are secured with the use of collateral in the form of real estate property. Borrowers are obliged to pay back the loan through a predetermined number of payments.

The Most Important Things To Know About Mortgages

  • Mortgages can be referred to as being “claims on property” or “liens against property”.
  • The lender market also includes many non-banks.
  • Fixed-rate mortgages are preferred because borrowers pay the exact same interest rate, no matter how long the loan is.

Who Needs A Mortgage?

Both businesses and individuals now use mortgages in order to make larger real estate purchases. They allow them to not pay the entire price of the property up front. As years pass, borrowers repay loans plus a specific interest. At the end of the process, he or she owns the entire property.

The reason why mortgages are referred to as “claims on property” or “liens against property” is that when the borrower does not manage to pay the mortgage, the lender is allowed to foreclose the property, which practically means gain ownership.

With residential mortgages, homebuyers pledge houses to a bank or another financial institution that offers the loan. If the homebuyer defaults on mortgage paying, the lender has a legit claim on the property. When foreclosure happens, lenders can evict tenants to then sell the house. The income gained from this sale would cover mortgage debt.

Mortgage Types

There are various types of mortgages that exist on the market right now. The very popular ones are fixed mortgages for 15 or 30 years. There are also mortgages that can be really short, around 5 years, with some being over 40 years long.

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When you stretch payments over a larger number of years you gain access to lower monthly payments. However, the interest you pay is also higher.

Fixed-Rate Mortgages

These are really popular because borrowers pay the exact same interest rate and monthly payment for the entire duration of the loan. When market interests go up, borrowers do not have to pay more. When interest rates drop, lower rates might be possible through mortgage refinancing.

Adjustable-Rate Mortgages

With this type of mortgage, interest rate is fixed for a specific initial term. Then, it fluctuates based on market interest rates. Initial interest rate tends to be under market rate. This makes the mortgage much more affordable. However, this is only the case when looking at the short term. When looking at the long term, it is not that affordable.

When interest rates increase, borrowers might end up in the unwanted situation in which they cannot afford making higher monthly payments. It is also possible that rates decrease. In any case, monthly payments cannot be predicted after the discussed initial term.

Other Mortgages

You might also find other mortgage types that are less common. For instance, many non-banks offer interest-only mortgages. There are also payment-option adjustable-rate mortgages, which involve really complex repayment schedules. It is better to opt for other types of mortgages except those mentioned above when you already have a lot of experience in dealing with mortgages. It is really easy to get into serious financial trouble when you choose other types, as countless homeowners did during the 2000s housing bubble.

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Most of the mortgages used to buy homes are now forward mortgages. The reverse mortgage is designed for the homeowners that are older than 61 and want to convert some home equity into readily-available cash. Such homeowners are borrowing based on home value. Money is gained as lump sum, line of credit or fixed monthly payment. Loan balance is due and needs to be paid when the homeowner sells the property, permanently moves away or dies.

Choosing The Right Mortgage For You

There are countless banks that now offer mortgage loans in literally all countries around the world. In the past, just banks offered such loans. Nowadays, many other lenders hit the market.

When you shop for your mortgage, using online mortgage calculators is a wonderful idea since it shows you how much you need to expect for monthly payments. Such tools calculate total interest costs over a mortgage’s life.

It is possible that the mortgage issuer sets up some sort of escrow account to be used to pay property-related expenses. Money going into this account comes from monthly mortgage payment, but only a specific percentage.

Final Thoughts

Mortgages include many different variables, including what has to be repaid and when payments need to be done. Homebuyers need to consult mortgage experts in order to make really good choices and find deals that are perfect in their case. A mortgage is usually the largest loan someone takes during the duration of his/her life.