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What Is A Mortgage ?

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Want to buy your dream home but don’t have the funds in cash? Well, you can still make it by getting a mortgage.

So what exactly is a mortgage? 

It is an agreement between the bank and the borrower. The lender or the bank provides the mortgage in return of the property as collateral.
Here’s what happens in the case of a mortgage: When you decide to take a mortgage to buy a property, the lender gives you the money (provided you are approved). However, there’s a condition – the property you wish to buy shall be kept as a collateral. Such an agreement is fair to the lender, as there is no risk for their investment. And yes, their lending you is a sizable investment.
Now, here’s the important thing: when you take a mortgage, you are legally giving the lender permission to take the property in a foreclosure. This means that they can move you from your home forcibly in case you are not able to pay back.

The sale of this property shall be used by the bank to refill its coffers.

Mortgage and home loan – how are they related?

Is a mortgage the same thing as a home loan? In most cases, they are similar.

These two terms are used interchangeably quite often. In the technical sense, a mortgage is the agreement that actually makes getting a home loan possible. This means that unless you have a mortgage, there’s no home loan coming either.

In case of real estate transactions, you have to get the agreement in writing. This agreement is a legal one and gives the power of foreclosure to the lender.

In the next section, we’re going to cover the various types of mortgages.

Types of mortgage

Whenever you think of the term mortgage, you thought there’s just one type of mortgage, right? Well, that is not true. Actually, it has multiple types.
While it may seem to make things much more complicated, all this segmentation actually allows you to pick the one you really need. 

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Fixed-rate mortgage: This is the simplest form of loan. You’ll be making the same payment for the entire duration of the loan, unless of course you pay more to get rid of the debt faster. It often has a term of 15 to 30 years. 

However, you may also come across others with shorter or longer loan repayment periods. Here’s something to remember: the longer your term is, the more you’ll ultimately pay.

Adjustable rate mortgage: These are similar to fixed rate mortgage, but there’s a big difference. The interest rate is variable and can change in the future.
As you can understand, when your interest rate increases, so does your monthly payment. That’s certainly not a good thing. 

However, the opposite is also true. If the monthly interest rate falls, you’ll have to to pay less. You won’t be seeing such sudden changes from one month to another, though. You’re more likely to see this difference over the course of years. Adjustable rate mortgage is considered risky because there’s no way to predict where your interest rate will be in 10 years.
Home equity loans or second mortgages: These are not exactly for buying a new home. These are for borrowing funds by keeping your existing home as a collateral. To take a second mortgage, you put a new one on top of the existing one. 

Now, here’s the thing – your second mortgage remains in second position. This means that it will be paid only if there is any money left over after the first mortgage loan provider is repaid. Often, this type of mortgage is used to pay for higher education and home improvements.

Reverse mortgage: These are generally paid to homeowners who are over 62 years of age. Candidates needed to have strong home equity. This type of mortgage is sometimes used by retirees to supplement their existing income, as well as to get funds from cash out properties what they have paid off a long time back.

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Here, borrowers don’t pay the bank or the lender. They are instead paid by the lenders. The loan needn’t be paid back until the home is sold or vacated.
Interest-only loans: In the case of interest-only loans, you have to pay just the interest costs per month. This means that your monthly payments shall be smaller since you are not repaying any loan balance. 

However, there is a drawback: you’ll have to repay the debt at some point of time as you are not paying down the debt and are building home equity. As you can understand, interest-only loans make sense in the short-term, but are not a good option for those hoping to build wealth. 

Balloon loans: This mortgage is different as these require you to give a big “balloon” payment. In this type of loan, you need to make a considerably large one-time payment to remove your debt, instead of making the same payment over a large period of time. Typically, after taking this loan, you’ll have to repay the amount after 5-7 years. Balloon loans are good for getting temporary financing. However, the risk is that you may lack the funds you need when it comes to repaying the loan.

Refinance loans: These are a special sort, as they allow you to swap mortgages if you find a better offer or deal. 

Here’s what happens: when you refinance a mortgage, you get a new one that takes care of the old one. In other words, you use the new mortgage to pay off the old one. This may seem like a good thing, or you may think that you can continue taking one mortgage after another indefinitely, but it does not work that way. 

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Due to the closing costs, the process can be very expensive. However, the loans in question don’t need to be of the same type. That allows for some flexibility.

Knowing the different types of mortgage can certainly be helpful. Imagine walking into a bank for a mortgage. You tell the bank’s rep that you’re looking for a mortgage. The rep asks you which type you are looking for. And that stumps you! You thought there’s just one.

…Well, not anymore!

FAQs

What are the 3 types of mortgages?

Actually, there are more than 3 types. There are as many as 6 types and sub-types of mortgage.These include:
Fixed Rate Mortgage (30-year mortgage, 20-year mortgage, 15-year mortgage), Adjustable Rate Mortgage (Variable Rate Mortgage, Hybrid ARMs, Option ARM), Balloon Mortgage, Interest-Only Mortgage, Reverse Mortgage, Combination Mortgage, Government-Backed Mortgage, Second Mortgage, and others. 

Why is a mortgage called a mortgage?
The word ‘mortgage’ is actually derived from a French law term. It is supposed to be developed or penned first in the Middle Ages in England. The term ‘mortgage’ from then is supposed to refer to ‘death pledge’ as the loan payment obligation is fulfilled only when the money is paid back, or when the borrower’s property is taken away through foreclosure, or when the borrower has passed away. 

How do I get a mortgage loan?

Here are a few things that you can do:
1) Know your credit score and understand why it is the way it is
2) Keep your job
3) Save money
4) Avoid new debt and pay back the old ones
5) Get pre-approved for a mortgage
6) Choose to buy a home that you can realistically get

To Sum Up

In this article from mymoneykarma, you have learnt:

  1. What is a mortgage?

  2. Difference between a mortgage and a home loan

  3. Types of mortgage

We hope that you have enjoyed reading this article just like we enjoyed compiling this information for you.

 

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