Mortgage is a legal tool that pledges a real estate property as repayment in order to obtain a loan. Even though a person does not have enough funds to buy a property outright in cash, he can do so through mortgage. Mortgage provides the guarantee that the loan will be paid back on time. How so? Should the borrower fail to pay for the loan, the lender may recover the amount of loan by foreclosure and sale of the mortgaged property.
A note, specifying the financial terms of a loan agreement is one part of the mortgage lending process. The second part, the mortgage paper describes the legal specifics of the property and further promises the property as guarantee for the repayment of the loan.
Mortgage lenders are usually banks, credit union or other financing institutions. These lenders mostly require the borrower to put up a certain amount of cash as down payment for the purchase. If the borrower aims to buy a 200,000-dollar-home, he has to pay first the required down payment of $10,000 from his own funds then apply for a mortgage loan in the amount of $190,000 to cover the difference.
Lending firms are quite strict on granting mortgage loans. Lenders require information details of the borrower and use it to assess the borrower’s ability and readiness to pay the loan. Needless to say, the borrower should disclose to the lender, personal as well as business facts, from whom he is securing the mortgage loan.
Before a mortgage loan is granted, the property put up as guarantee will be appraised for its estimated market value by a professional appraiser. The lender wants to make sure that the value of the property is equally worth as the loan in case the borrower defaults on the loan and lender has to foreclose said property.
Mortgage loan is granted after all the requirements are satisfied. The mortgage loan agreement will spell out the current interest rates and loan repayment terms like amount and frequency, etcetera.
The mortgage loan interest rate and number of years will determine the amount of monthly payments. Duration of mortgage ranges from the shortest, 1 year up to 25 years or possibly more.
There are other conditions the borrower has to comply when he accepts the mortgage loan. First, he must sign a promissory note that he is obliged to repay the mortgage debt. Second, borrower also has to have fire and other hazards insurance on the property, as well as pay the property tax. Failure on the part of the borrower to fulfill these obligations constitutes a default on the mortgage loan and will mean foreclosure on the property by the lender.
The actual mortgage loan fund release will happen at the end. The borrower will receive the money intended for the house purchase from the lender and sign the mortgage documents. The mortgage loan definitely will have other costs to be borne by the borrower. These costs or charges are usually processing fee, charges for credit reports, appraisal fee and other service fees relative to the application for the mortgage loan.
Mortgage payments schemes will largely depend on the interest rate and payment period. Interest payment is the first part and principal payment is the second part of the mortgage payment.
In a mortgage payment, interest is the cost for using the money of the lender while principal is the amount the borrower still owes the lender. The process of repayment of mortgage is call amortization.
The details of mortgage repayment will be thoroughly discussed by the lender with the borrower during the transaction so that both parties will comprehend the full scope of the agreement. Monthly payment schedule of the mortgage loan will be provided to the borrower and becomes part of the mortgage documents.
At the end of the mortgage loan transaction, both parties emerge happier – the lender, for having served a satisfied customer; the borrower, who has just bought his dream project.