What is Mortgage?

Posted on 10 October 2009

Let’s assume that now the time has come when you’d like to buy a house. There are chances that you don’t have enough cash in the bank to pay for it in full. Instead of making full payment, like a car, you would probably prefer to put a small amount down, and make monthly payments on the rest. This is the purpose that is served by a mortgage loan.


The property is held as a collateral

A buyer wish to get a mortgage loan so that he or she may pay off the seller of a piece of property in full. Then the buyer owes the mortgage lender the total amount that he has borrowed, plus interest and fees. The lender of the mortgage holds the deed or ownership of said property, as collateral or guarantee of payment until the buyer pays the mortgage off. However, the property is occupied by the buyer as if it were already his or her own.

There are many types of mortgage loans that are available, and which one among these is best for a particular buyer depends on his or her financial situation and long term plans. Some people decide to stay in a house for thirty years; others in order to move up the real-estate ladder make short-term investments. It requires time and energy both on the part of buyer and lender for matching the right client with the right mortgage loan.

APR of a mortgage loan

Closing fees, points, and the annual percentage rate(APR) are a few of the common terms that are associated with mortgage loans. It is suggested by the experts that by comparing the APR of a mortgage loan the buyer would be able to determine which mortgage is less expensive, as law requires that all fees be included in this calculation. Usually the APR of a mortgage is not advertised and the buyer must ask for this information from the mortgage lender.


Private Mortgage Insurance (PMI)

If a buyer is able to put down 20% of the buying price in cash, then the mortgage interest rates will be lower and then the buyer will not have to get Private Mortgage Insurance (PMI). PMI is required for those buyers that are having little or no equity, as PMI will make mortgage payments in the event the buyer cannot.

PMI is required for the Lenders in order to protect their investment in case when a buyer puts less than 20% down, due to the reason that mortgage, with fees and interest, will initially be greater than the worth of the property. When the loan has been paid down over a period of time then this change, building up approximately 20% equity, then this is the point at which PMI (and its fees) terminates.

After PMI expires, if in case the holder of a mortgage misses payments, the lender can then foreclose on the loan. What it means is that the buyer has defaulted on his contract to pay the mortgage, and the lender has the right to evict the buyer and sell the property to recoup losses.


Mortgage Refinancing

If a mortgage holder is suddenly strapped for cash and he has built up a substantial equity in the property, then he or she might consider refinancing. The monthly payment can decrease by refinancing the mortgage over a longer period of time. Some people refinance in order to draw equity out of the home in the form of a cash payment, which they often used to make improvements on the home.

There is a general rule of thumb and that is a mortgage payment should not exceed 28% of the total income of the qualifier(s). If you want to qualify for a mortgage then it will require an acceptable debt-to-income ratio.

Mortgage loans can be fixed-rate or variable, short term or long term. Before deciding on the best mortgage plan and lender, be sure to get professional advice, educate yourself thoroughly on your options, and shop around.

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This post was written by:

R. MAK. – who has written 325 posts on Loan Mortgage Credit!.

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