Even the wisest savers are unable to pay the full amount of a house out of their savings, and hence require a mortgage loan to own the desired property. In simple terms, mortgage finance or a mortgage loan is a common way to purchase a property without the buyer having to pay full value of the land or home upfront. Generally, mortgage loans come with an agreement that the property borrower would pay the seller the principal amount of the property plus pre-disclosed interest in regular EMIs set over a time period. The interest rates are usually calculated at either a fixed or variable rate, and the term of mortgage finance varies between 10 to 30 years.
What is Mortgage finance or mortgage loan?
By definition, mortgage finance means, “A loan secured by the collateral of some specified real estate property which obliges the borrower to make a predetermined series of payments”.
In a common mortgage finance option, the buyer has to provide collateral assets that the borrower promises to the seller in case he/she defaults. In most cases, the deed to the house remain as collateral. However, it may differ according to lender’s requirement. In case the buyer is unable to make the payments, the seller will have rights to seize the house to recover its investment, otherwise understood as a foreclosure.
Understanding Mortgage loan terms
Other than 10 to 30 years of tenure, people can also opt for longer-term mortgages if the buyer plans to reside at the property for long time and who can better afford lower down payment and interest rate spread over a longer duration. But, such people typically pay much higher than the initial value of the owned land or the house, because of the interest accrues over time. Short term mortgages are the best option for people who can afford higher monthly payments and use the property for investment purpose. One smart option would be to remodel the house and sell it for greater value eventually.
Mortgage Loan Eligibility
One must have clear debt record with banks to qualify for best mortgage finance. Because most lending institutes, banks or companies consider a debt-to-income ratio when deciding whether to let the applicant receive the finance. Many a time the mortgage loan application gets rejected if the borrower already has a high burden or debt such as credit card debt, personal loan or a student loan. However, if the buyer is willing to make a higher-than-average down payment to lower the loan amount, then debt-to-income consideration may be avoided.
Types of Mortgage loan – Fixed and Variable
Under fixed rate mortgage finance the interest rate decided does not change, for example, if you buy a loan for 20 years with fixed interest rate on loan of 5% then it will remain same until you finish the home loan tenure.
When it comes to variable mortgage loan, otherwise known as the adjustable-rate mortgage (ARM), it is the interest you pay that vacillates based on an index which reflects the cost to the lender of borrowing on credit markets. The loan is offered at the lender’s standard variable rate vs. base rate.
When buying a home, you may opt for fixed or variable rate also with any preferred company, but make sure to read all of their terms and conditions prior to avoid a lot of financial harm in your future. Sometimes, the lender may ask for base fees and prepaid loan interest, which are not included in the pre-set monthly total but can be understood by examining the annual percentage rate or APR. So, always look at the APR factors for getting a better idea of the deal.