Mortgage

A loan taken to purchase or maintain a residential property, land, or any other type of real estate property is called Mortgage. The real estate property serves as the collateral for this loan. The borrower repays the loan in regular instalments that include principal and interest as per mutually agreed rate of interest.

What is a mortgage?‍

A mortgage is a type of loan where the borrower borrows a certain amount from a lender by keeping a real estate asset as collateral to purchase or maintain a residential property. This collateral can be another property or land or the same property that the borrower takes a mortgage on.  

There is an interest levied on the principal amount of the mortgage which the borrower must pay back with regular installments. This installment amount includes the monthly interest rate and a certain amount that goes towards the principal. 

To take out a mortgage or apply for one, the borrower must select a financial institution or lender that offers him favorable terms and interest rate. If the borrower fails to pay back the mortgage amount or defaults on the loan, the property can go into foreclosure and the lender is legally allowed to seize the property. 

What is the difference between a mortgage and a home loan?‍

A mortgage and a home loan are as different as chalk and cheese. A mortgage is a type of loan where the borrower gets the money by using his property as a collateral to secure the lender. On the other hand, a home loan is a loan where the borrower gets the money from the lender to purchase a new property or use the money to renovate his existing home, without putting anything as collateral. 

However, in both the loans, the lender has a right to seize the property in case the borrower doesn’t pay back the loan. 

How many types of mortgages are there?‍

Borrowers must be aware of the different types of mortgages available, amongst which these following 5 are the most popular choices:

1. Conventional mortgages - Conventional loan is a type of mortgage which is not backed by the federal government or a government entity. This loan is given out by private lenders such as banks or credit unions. This type of mortgage usually requires the borrower to have a high credit score and the interest-rates are also higher. 
2. Jumbo loan - A jumbo loan is a more expensive form of conventional loan which is used to purchase luxurious, highly-expensive homes that cannot be bought through conventional conforming loans. To get a jumbo loan, the credit score of the borrower has to be exceptionally good and the down payment amount is also very high. 
3. Government-insured loan - There are three types of government backed mortgages available which are Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) and the U.S. Department of Veterans Affair (VA). These mortgages are specially designed to help low-income and middle-income households purchase a home. In these mortgages, the credit score requirement is lower, the down payment amount is also lower and is a viable option for first-time home buyers. 
4. Fixed-rate mortgage - In fixed-rate mortgages, the rate of interest is fixed for the entire duration of the loan. This means that the borrower's monthly installment amount remains the same for the life of the loan. Even if the rate of interest in the market changes, it does not affect the rate of interest of the fixed-rate mortgage. 
5. Adjustable-rate mortgage - Differing from fixed rate mortgage, an adjustable rate mortgage has a flexible rate of interest which changes as per market and economic conditions. This means that periodically the interest rate can go higher or lower and the borrower will be liable to pay the updated rate of interest which can sometimes be a huge amount. 

Conclusion‍

Mortgage is an important term for borrowers as they need to understand the resourcefulness of a mortgage before they can apply for one. This allows them to purchase or reconstruct a house for themselves and get plenty of time to pay it back to the lender. As there are different types of mortgages available, a borrower must closely understand his income potential, down payment and monthly payments he would need to make when he chooses one. It is important to choose a mortgage that the borrower is comfortable paying off instead of choosing one that has higher chances of defaulting just because it gets him a luxurious space. 

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