What is a Mortgage? What Do I Need to Know?
A mortgage is a loan taken to buy land or a home. The average cost of a house in the US is $200,000. The average salary is $81,400, showing that most people would find it difficult to afford a house. Therefore, it makes sense to take a mortgage and repay it over a period of time, keeping aside a part of the monthly income to clear the loan.
The mortgage is a secured loan, that is taken against the home or land. Usually, a mortgage is taken for a period of 25 years. However, in practice, most loans may be for a lesser period or even maybe for 30 years. Banks and other lending institutions offer the mortgage. Alternative sources are also available.
How it works
A mortgage is a loan taken for a home or land for its value. A part of the amount, called as the down payment has to be made in advance to the lender. Usually, it is around 20% of the mortgage or loan value. For example, if you buy a house for $200,000 you have to pay $40,000 as down payment. Lesser down payments are also possible, in fact down payment of only 5% is available in certain cases.
The balance amount has to be repaid over the term of the mortgage. Interest has to be paid to the lender. The interest rate may be fixed or decided in advance. It may also be variable or floating as is changed depending on the market rate. The principal amount and the interest has to be repaid monthly till the entire loan and interest is cleared. The property is taken as a collateral, if you default on payment, the lender can sell the house and recover his dues. This is called foreclosure.
How can you get a mortgage?
Mortgages are offered usually by banks. Wells Fargo, Chase, Bank of America are the top lenders in the country. If you want a mortgage, then there are certain eligibility criteria you need to fulfill. Key criteria would be your credit score. The credit score is awarded by credit agencies based on your past history of loans and repayment of loans and bills. A score of 720 is an excellent score. A score of 660 should be enough to get a loan, but it varies from lender to lender. If you have a low credit score, then you may have to pay a higher interest rate.
You need to submit an application, where you have to disclose all your liabilities and list out your sources of income with documents to support it. The lender would examine your application and all the documents submitted before deciding on whether you grant you the loan or not. You may be called for a personal discussion before a decision is taken.
When you take a mortgage you are paying the value of the home or the principal and the interest to the lender. You also have to pay taxes and insurance, which may be included in the mortgage. Generally, you will pay more of the interest first and later on, you will paying the principal.
Paying it back
You need to plan your household budget to ensure you pay the monthly payments on time, so you don’t default. On completion of the mortgage tenure, you would have repaid the entire loan with the interest and the property will not belong to you.
Government and other agencies offer mortgage scheme with lower down payment and interest. Do check out these schemes and make sure you avail of it if you are eligible.
A mortgage is a loan to buy a house or land, which you have to repay over a long period of time. The property will be yours once you repay the loan.