A Guide to Mortgages
One of the types
of debt we hear about the most is also one of those people tend to know less
about: Mortgages. Mortgages are so ubiquitous that they’re often mentioned, and
not only in the news – it’s quite common for characters in movies or TV shows
to worry about their mortgage. However, what is a mortgage, other than an
overhanging debt?
A mortgage is,
by definition, a type of loan. However, unlike with other loan types, mortgages
normally involve collateral in the form of a real estate property. If the terms
of the mortgage aren’t followed, the issuing entity can take over the
underlying property. Generally, they’re offered by banks, although credit
unions or other societies may also offer them.
What are they for?
Most mortgages
these days follow a common goal: Allowing someone to buy a property. However,
they can also be used in case of emergency, especially when people desperately
need large amounts of money, their application might be unsuccessful without
collateral. Another common use for mortgages is economic development, where a
company might mortgage its headquarters to raise money for further expansion.
These housing mortgages, how do they work?
The limit on a mortgage is set by the issuing entity and represents the most an applicant can
spend on a property. The applicant must also make a down payment, usually 20%
of the property’s value, with the bank paying the shortfall. The house is then bought,
and the applicant is enrolled for the property deed.
From then on,
the applicant must repay the money to the bank, either by monthly payments plus
interests or in a lump sum. The monthly payments and interest rate are set when
the mortgage is signed and generally relate directly to the applicant’s credit
score. Mortgages with higher monthly payments might accrue smaller interests in
the long run, since they’re paid faster.
So, I get a free property, nice. What then?
It’s not so much
a free property as it is a loan to buy a property. A loan with a very big
clause: If you default in your payment, the bank is entitled to the deed of
your property. Since in homeowner loans you’re asked to put down 20% of the
cost of the property plus monthly payments, defaulting on your mortgage means
losing the property, the initial deposit, and any monthly payments you made.
And what if I can’t pay?
In most cases,
banks are willing to work with homeowners who can’t pay their mortgages due to
circumstances beyond their control. While they’re often painted as evil
entities interested in your home, banks usually would rather the mortgage gets
paid in full then enforce a seizure.
In fact, the worse-off the economy is, the more likely a bank is to renegotiate mortgages. Huge mortgage credits for people who had no way to pay them was, after all, what set off the US housing bubble of 2006, leading to a nationwide recession.
This crisis saw to it that many people couldn’t pay their mortgages, and this
led to the crash of housing prices. As a result, many other people with
mortgages found themselves having to pay more on their mortgages than the
properties were worth, and thus decided to also default on them. This led to
banks losing massive amounts of money while taking over lots of properties that
weren’t worth nearly as much as the money lent.
In order to
avoid this kind of crisis, banks these days are much stricter with mortgages.
People who just fifteen years ago might have been eligible for mortgages on
huge properties are usually offered much less these days. However, to avoid
this bubble from happening again, banks are usually willing to negotiate and
give people breathing room before taking over their payments.
How long do I have to pay my mortgage?
The length and
the monthly payment will depend on the property and your credit score. Usually,
banks offer 15 and 30-year options for mortgage payments: That is, the mortgage
payment plan is drafted to assure the property will be fully paid in that time.
If you go for a shorter timeframe, you’ll face higher monthly payments, but
you’ll also end up paying less, in the long run, thanks to lower interests.
Are there any other costs?
Yes. There are
several extra costs that must be paid at the end. These costs are for both
paperwork and other required fees, like insurance, appraisal costs, and any
other processes the bank takes up on your behalf. You can sometimes pay them
up-front, pay them at the end, or have the bank pay them. However, if you’d
rather have the bank pay them instead of financing them yourself, you’ll face
higher monthly payments and interests rates.
These costs
aren’t hidden, although most people don’t think of them at first. They’re
related to all the actions required to buy or sell a home we often ignore,
along with legal obligations the homeowner must fulfill.
What if I have a bad credit score?
Many banks are
interested in allowing people to buy properties and will offer plans for most
people who aren’t in high risk of defaulting. However, if you find yourself
unable to obtain a mortgage from a bank, or if you would rather not do so,
there are alternatives. Many national governments offer housing plans,
generally with lower payments and interests than banking mortgages. The real
estate they deal in is less luxurious, and usually in middle to a low-class neighborhood, but they are in turn more affordable than private mortgages.
There are also
institutions that offer mortgage processing to eligible people. Generally,
these institutions deal with specific markets, such as armed forces
personnel or university professors. Unions often get housing benefits for
their members and said benefits can at times include mortgage financing. For
most people who want to buy a home, there are many ways to help.
About the other types of mortgages and more
Homeowners’mortgages work because the applicant must pay a percentage of the cost of the
property when the mortgage is created. In cases where a property that’s already
fully owned is offered for a mortgage, this payment doesn’t apply. Instead, the
only collateral is the deed itself, as the applicant risks losing their wholly-owned
property if they default.
For mortgages
relating to the economic activity, such as those taken by companies, plans on
what will be done with the mortgage must often be presented and accepted by the
bank.
finally, as a
side note for housing mortgages, many institutions will offer different
interest rates for people buying their first home and people buying extra
properties. Just as well, if you’re applying for a mortgage on a property that
you intend to rent or are already renting, you must disclose it. In most cases,
these will lead to higher interest rates and payments, as the lower interests
are usually offered only for people looking for a place to live.
Comments
Post a comment