Important Facts About Mortgage Repayments That You Should Know
Whether you are an individual or a business entity, you may come across situations where loans are the best funding option available to you.
13:22 06 May 2021
Although often the need for funding is not very huge in most cases, it is likely that you find yourself needing a large sum of money once in a while.
The need for funds may be triggered by a great deal or investment opportunity coming your way that you just can't let go of. For example, if you have found a dream property that you always wanted to buy, you will need to arrange funds immediately because the house may not be up for grabs for too long.
Do You Know About Mortgage Loans
Just like there is a specific kind of loan for every situation, you have dozens of options when it comes to huge funding needs, and mortgages are one of the most trendy and effective alternatives. As the name suggests, mortgage loans are collaterally secured loans for which there are several lenders in every region. To have a better understanding, let us have a closer look at the mortgage loans.
Here’s What Mortgages Are
A mortgage loan, simply referred to as a mortgage is a kind of long-term loan that is used by the borrowers either to purchase a new property or maintain a home or other kind of real estate. As mentioned earlier, the loan is secured on the borrower’s property which serves as the collateral to secure the loan.
Putting a lien on the property that is being mortgaged, the existing property owner can raise funds for any purpose besides purchase or maintenance of the real property. A lien is nothing but a kind of security interest that is placed over a property in order to secure the payment of debt along with the performance of other pre-specified obligations.
Who Can Be The Borrower
The mortgaging borrower can be both an individual or a business. While an individual borrower generally mortgages their home or other personal properties, a business mortgages commercial property such as their business premises, investment portfolio, or residential property. The primary difference between individual and business borrowing is the number of funds required. Since the businesses generally require higher funding, the value of their collateral also needs to be at par. What is more, the process of getting a mortgage loan for a business may be a bit more complex than that for an individual.
What Are The Documents You Need To Have
Before you can apply for a mortgage loan, you need to make sure that you have all the required documents to meet the eligibility criteria. Although different lenders may ask for different documents since there is no universal rule regarding this, there are some papers that are typical and are asked for in most cases.
When you are sending your mortgage application to the lender, you need to provide the lender with legal evidence for the mortgage. Aside from that, you may also have to send proof of your current employment, investment statements, bank statements, your recent tax returns, among other documents. For most lenders, the absence of any of these documents may be grounds for turning down your mortgage application. The process is not yet complete. In addition to scrutinizing all your documents, the lender may also want to run a credit check on you to ascertain every bit of it.
The principal amount along with the interest is paid back by the borrower in installments over a period of few years. The interest on such loans is generally not very high, but terms and obligations for payments remain inflexible to a great extent.
How Do Mortgages Work
Any individual or business who needs funding in large amounts may use mortgages to buy the property or for any other purpose depending on the need. Since they cannot pay the price upfront, they need a lending institution or any lender to provide them with the funds needed to make the transaction.
What You Need To Know About Mortgage Repayment
Although the structure of mortgage repayment is simple and plain, there may be some bits that may cause confusion. Therefore, it is rather important that you understand different aspects of it in advance. The primary factors that determine your mortgage payments are the size of the funds borrowed and terms (length of time you have to pay it back) for the same.
In general, the longer the term, the lower your monthly installments. It is so because the amount to be repaid is spread over each month in the years. Once you know the clear size and term of the loan and related numbers, a repayment calculator can help you calculate repayments as well as it will allow you to compare different lenders and mortgage types. An important tool for analysis and comparisons, you can use the calculator before choosing your lender as it will tell you which one is costlier and which is not. All you need to do is put in the details, and the system will calculate it for you in no time.
What Are The Different Components For Mortgage Payment
There are four major factors based on which your entire mortgage payment is calculated: principal, internet, taxes, and insurance. The four terms are collectively abbreviated as PITI. Each of these components affects your monthly payments and the entire cost of the loan. Therefore, you need to pay close attention to how these function. Let us have a deeper look at each one of them:
The principal is the amount that you borrowed from the lender. For example, $200000 is the principal amount in a loan if this is the amount you got from the lender for the purchase of the property. Every time you make repayments for the mortgage, some portion of your principal payment obligation comes down. The graph of the proportion of principal returned to the borrower keeps on increasing with every payment solely due to the structure of such loans. In other words, the payments in the first years may include more interest, on the other hand, the payments in the last years will carry more of the principal amount.
Interest is the source of income for the lender that you pay for the risk they took and helping you at the moment. Interest rate is one of the most important impactors on mortgage repayment. It is interest that defines the cost of the loan for you. Generally, for long-term loans, the interest rates are lower. You can borrow more if the interest rates are lower and vice versa. Therefore, you should definitely weigh out your potential lenders on the scale of interest rates besides other factors.
This is where government agencies come into play. These are real estate or property taxes that the government levies on you have bought to fund different forms of public services. Though the government calculates these taxes on a yearly basis, you can choose to pay the taxes to your lender as part of your installment. For most borrowers, this method is more convenient to follow as compared to yearly payments. Your lender will hold the tax portion of your payments in escrow till the end of the given year, and pay it in full once it is fully collected.
In order to calculate the tax amount to be added to each payment, all you need to do is divide the total tax amount due by the number of times you pay your lender in a year. The amount you get as a result should be added to your mortgage payment every time you pay.
The property insurance is to protect the home and its contents from damages caused by fire, earthquake, and other disasters. Theft and vandalism are also covered in some insurance policies. The payment of insurance works just like taxes. You can pay all your insurance payments to the lender who would hold it all in escrow until the due date. The calculation process is also the same for the insurance: Divide the entire insurance amount due by the number of months that you make the mortgage payment. Add the divided amount to the total mortgage payment.
You must remember that it is totally up to you if you want to pay the taxes and insurance in installment through your lender. You can opt to pay at once on the due date. Though that would reduce your mortgage payments each month, the payment of taxes and insurance is absolutely mandatory - pay in advance or later at once.
What Are The Different Types Of Mortgages
Many people do not know, there are several kinds of mortgages - each having a set of specific advantages. There are types based on the rate of interest and term of the mortgage. Some can be for a period as short as 5 years, while others can stretch over 40 years. Depending on the kind of employment you have, and your financial status, you can choose one and drop the other. Let us list down all the major kinds of mortgage loans:
Also known as the traditional mortgage, fixed-rate mortgage is the most common type of mortgage loan. With the fixed-rate mortgage, the interest rate remains at one spot thought the life of the loan. Due to that, the monthly mortgage payments made by the borrower also remain the same from beginning to the end. The rate of interest is defined and agreed upon by both parties before the contract is drawn out for the mortgage. One thing you should know is the interest rate in the case of fixed mortgages does not necessarily need to be equivalent to the ongoing market rate. It could be anything that the parties shake hands on.
The adjustable-rate mortgages are a bit complex as opposed to regular mortgage loans. As the name suggests, the interest rate for these mortgages is adjusted over time. Fixed for the initial term at the ongoing rate, the interest rate then keeps on changing periodically as per the market conditions. It is due to that ARM is not recommendable for a large period of time as it is both risky for the borrower and the lender. In order to subdue the impact of market dynamism on the interest rates, there is generally a limit or cap on how much it can rise at a time.
Just like its name, reverse mortgages involve the conversion of owner’s equity in their homes into cash. In this type of mortgage, the homeowner needs to be 62 or older to be eligible to participate. The money can be borrowed against the value of the home. The form of payment could be monthly installments, lump sum, or line of credit depending on the convenience of the parties involved. After the citizen dies, moves away, or sells the home, the entire loan balance becomes due.
There are a few more, less common types of mortgages such as payment-option ARMs and interest-only mortgages. Due to the complex nature of their repayment, they are not used a lot. The ones who tap these mortgages are the ones who are pro in the market and know it inside out.
We hope that the details given above prove to be helpful to you. While going for the mortgage as your funding choice, make sure you know all about it - especially the repayment methods. Pay attention to the interest, taxes, and the term of the loan. Remember that everything is connected. An increase or decrease in one factor may result in changes in other factors. Talk carefully with your lender and seller, and ascertain all the terms and conditions can be met easily. Once you are through with that, you can go ahead with it. The repayment is mostly seamless! Your job comes down to just keeping track and calculating how much you need to pay after incorporating the tax and insurance considerations.