Understanding Mortgage

Investing in a home is one of the major financial decisions people make in their lifetime. If you want to own a house, then it is essential to understand certain concepts associated with your endeavor.  When it comes to investing in properties, one of the most common terms you hear is ‘mortgage’. Shopping for a new home is definitely exciting; however, it is a bit complicated too. Let us explore more about this concept.

Mortgage- what is it?

In very simple terms, mortgage is defined as the loan a person takes to buy a property which can either be land, residential or commercial. Many banks, financial institutions and specialist mortgage companies provide mortgages.

Types of Mortgages-

On the basis of the interest rate, a mortgage can be classified as-

• Fixed Rate Mortgages: Many people prefer this type of mortgage, as this is very stable. Generally, the monthly mortgage payment remains constant for the complete tenure. Irrespective of the inflation rate, the rate of interest for fixed rate mortgage remains the same. If you choose on tenure over than 5 years beyond which it is hard to predict inflations. However, in case, the interest rates go down, you will not get benefit at all from the same. Nevertheless, you can opt for refinancing in such cases. Further, the rate of interest for a fixed rate mortgage is slightly more than the adjustable rate mortgage.

• Adjustable Rate Mortgages: This kind of mortgage plan is well known as it generally starts on a lower monthly payment and lower rate of interest. However, during the lifespan of the loan, the rate of interest can change. Each adjustable rate mortgage has a modification period that determines the frequency and time the interest rate can alter. There is a fixed initial period in which the rate of interest will not alter and range from 6 months - 10 years. The rates of interest alter on the basis of the margin and index. The index indicates current market conditions and the margin reflects percentage, which can be added to the index. These factors decide whether the rate of interest will decrease or increase. An adjustable rate mortgage has lower initial interest rates as compared to fixed-rate mortgage. Due to lower monthly mortgage payment, a buyer can afford more expensive homes than he or she would be able to buy with a fixed rate mortgage.

As compared to fixed rate mortgages, adjustable rate mortgages are significantly more complex.

Mortgage Payments – The term and size of loan are the primary factors determining your monthly mortgage payments. ‘Term’ refers to the time period within which loan amount should be paid fully whereas 'Size' refers to the amount of money borrowed.  There is an inverse relationship between the size and term of the loan. In simple words, shorter term results in higher monthly payments. So, select monthly payments wisely considering above factors. The most popular mortgage type is 30-year mortgage.

Mortgage Refinancing- Mortgage refinancing means to pay off the current mortgage and take out a new mortgage. Some property owners use this option for an improved credit rating. Some choose the mortgage refinancing, if another organization is offering a lower rate of interest that lowers the monthly payment or to change the type of loan.

Keep in mind that there are some criteria to be eligible for the refinancing options. The organization providing the refinancing option, evaluates your eligibility depending upon the value of your property, current mortgage details and your income. If a person meets all criteria, then he or she needs to complete the loan application form that will further help evaluate your credit history, financial situation, and the amount of equity you have on your property.

If you are planning to buy a home, then you should understand the concept of mortgage clearly. Have a look at your finances and consider the type of mortgage loan that you will be comfortable with. With some patience and a little bit of careful planning will make your search for the home of your dreams a financially responsible and rewarding experience. Get ready to have a great place to live without breaking the bank.

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