A good chunk of a typical family’s income is reserved for one of the longest running debts – the mortgage loans. Contrary to popular belief, mortgages are not just loans; they are also liens on the property for which they are granted.
Typically, the property you are buying based on the mortgage is collateral. Just like in auto loan, the vehicle, you buy using the money, is collateral which will be overtaken and re-sold or used by the lender in case you default on the monthly payments. Here are some vital facts about mortgages:
Most mortgages last between 10 and 30 years.
The factors based on which your equated monthly instalments (EMIs) calculated are- the amount being borrowed, the rate of interest, and the term of the mortgage. These factors are in turn dependent on a number of factors such as the type of property you are buying, your source and regularity of income, and our credit score. Mortgages for primary homes and secondary properties (holiday homes) also have slightly varying terms. Commercial mortgages are also available, and they are typically more complex and expensive that residential property mortgages.
Some of the important factors based on which you can qualify for a mortgage are: An optimal debt-to-income ratio (36%), a job that you’ve held for a good period (usually 2-3 years), adequate income, personal, professional, and salary verifications, document verification of almost every aspect of your life (incomes, expenses, savings, employment, educational, residential, citizenship, etc.), a good credit score, professional property appraisal and feasibility of providing closing costs and the down payment for the property.
Mortgages are not given for the entire value of the property that you are buying. You are expected to put down anywhere between 10 and 20% of the value as down payment, in addition to the closing costs of the mortgage, and for other expenses involved in processing the mortgage application.
The interest rate for your mortgage may be fixed or variable, depending on the loan agreement you sign. A fixed interest means you pay a fixed amount towards the interest for the life of the mortgage. A variable rate, however, consists of two parts – the fixed bank rate, and the variable base rate. If the base rate increases, then so does the interest you pay.
The amount you pay each month is an amortization of the principal sum borrowed, and the interest due each month. The portion of your EMI dedicated to these two parts varies during the mortgage lifetime. Usually, during the first part of the mortgage, a larger part of your payment is allocated to the interest, and a small amount goes towards reducing the principal balance. The status quo changes towards the latter part of the mortgage, as you would have paid off most of the interest by then.
Mortgage Loans are provided by bank lenders, the US Department of Veterans’ Affairs, and the Federal Housing Association. The latter two lenders offer mortgages at lower rates of interest. However, as their names suggest, there are additional criteria you need to meet to be eligible for such mortgages. Present and past military personnel can apply for mortgages from the first agency, while those who face financial difficulties and have disabilities can approach the FHA.