What is a Mortgage?
A mortgage is a loan that involves the use of real estate as collateral. It is usually a loan given by a mortgage lender or bank to help finance the buying of a home in exchange for the cash obtained by the individual to purchase the property. The lender gets the promise and assurance of the individual to pay back the amount borrowed within an agreed time. The property bought acts as the collateral in exchange for the cash borrowed to pay the mortgage. In other words, although the borrower possesses the property, it is the lender that has the ownership right of the property until the borrowed sum is paid in full.
Buying a home
Buying a home is easily one of the smartest financial decisions anyone can make. Firstly, acquiring a home under your name is an investment, as the value of a home usually appreciates. It is considered a physical asset and should you choose to sell, you can attract substantial returns. Another way to look at it is to see the living benefits that having your own space affords you. Not only do you have stability and a sustainable future for you, and your family, it also attracts social and tax benefits as well.
Importance of a mortgage
Mortgages provide an opportunity for individuals who lack enough funds to break down large purchases into smaller parts in order for them to be able to purchase certain properties like houses. There is a two-way risk factor that comes with a mortgage; borrowers are at risk of losing their property when they fail to pay, and lenders take the risk of giving out the loan as there is no guarantee borrowers will pay when due.
How a mortgage works
The money borrowed, the principal, is charged interest on by the bank or mortgage lender until principal and applicable interest is repaid. Typically, the kind of mortgage you apply for determines on what schedule and proportion the interest and principal is paid off.
Types of mortgages
There are two main types of mortgages;
- Fixed Rate Mortgage
- Adjustable-rate Mortgage
Fixed Rate Mortgage: In this type of Mortgage, the interest rate is fixed for a number of years. This type of loan usually attracts a high-interest rate.
Adjustable-rate Mortgage: In this type of Mortgage, the interest rate varies all through the duration of the loan. The loan comes at an initial fixed rate for a number of years before alternating annually for the remainder of the loan. This type of mortgage can be a great deal depending on the interest rate environment, but also involves more risk and extra caution is warranted.