So, what exactly is a mortgage and how does it lead to a mortgage loan? As per various definitions, a mortgage is a sort of security or collateral that acts as a security for the repayment of a loan. It is not exactly a debt, but rather given to the lender as a security deposit against the loan of cash.
Taking a loan used for the purchase of a home, which serves as collateral and security is known as a mortgage loan.
The reason mortgage loans are so widely popular is because a person can easily get an amount of cash to purchase things against their property and later simply repay the mortgages on a monthly or yearly basis. However, such easiness could also sometimes result in disasters, when a person is not able to repay back his loan. Mortgage loans take a long time to fill up and you cannot be sure of the fact that you will be able to continue paying your loans a year or 5 year beyond.Incase a mortgage loan cannot be repaid, the lender has the right to take away your home.
The basic components of a mortgage loan are property, mortgage, debtor, creditor, interest and foreclosure.
Property: This is your estate, the land or home that will be financed.
Mortgage: This is the cash interest that will be dealt with the lender.
Creditor: The person who provides you with the loan and owns the rights of an interest in the mortgage.
Debtor: This person is you, the one who needs the cash.
Interest: The periodic charge of a particular amount on the use of the creditor’s money.
Principal: The amount or the size of the loan.
Foreclosure: The right of a creditor to take away your home in case you are not able to repay back their money. This ability is what makes mortgage loan so unique and vulnerable.
Mortgage loan itself is branched out into two types, fixed rate mortgage (FRM) and adjustable rate mortgage(ARM).
FIXED RATE MORTGAGE: A fixed rate mortgage is what is usually preferred by people, as it is a fixed amount that has to be paid throughout the life of a loan. There will be no variability in the fixed amount even if many years down the lane, market rates for the property would go up. The life term of a fixed rate mortgage could lead up to either 15 or at most 30 years.
ADJUSTABLE RATE MORTGAGE: Now this mortgage is considered to be very risky by many people, because of its variable nature. This means that with the passage of time the interest rate fluctuates according to the market index. Either the rate goes low and your able to pack up your loan or it can go so high, you’d start seeing stars around yourself. Therefore this method is mostly avoided as it is high risk to the borrower.
These were the basics of what exactly a mortgage loan is and how it can affect your financial situation. Always take professional help before going for these loans.
