Home Loan: Most people desire to purchase a house, as this tends to be one of the biggest dreams which they beckon to achieve. Efforts are employed by an individual in order to get the best their budget through a home loan.
Home loan is a secured loan which is obtained to purchase a property by offering it as collateral. It offers high value funding at economical Interest rates and for long tenors.
They are repaid through EMIs. (An Equated Monthly Installment (EMI) is a set monthly payment provided by a borrower to a creditor on a set day, each month). The property’s title is transferred back to the borrower after repayment.
The legal rights are possessed by the lender to recover the outstanding loan amount by the sale of the property incase if the borrower cannot repay the dues or loan.
A home loan can be opted to buy a new house or a plot of land where a house can be constructed, renovation, extension and repairs to an existing house.
A home loan is an amount of money borrowed by an individual usually from banks and companies that lends money. The individual has to pay back the loan amount with interest in Easy Monthly Installments or EMIs over a period of time that can vary between 10-30 years depending on the nature of the loan.
This Is Also Known As Mortgage:
There are different kinds of home loans option that are suitable for every unique situation.
Home loans can be taken to buy properties that are either personal or commercial use.
These Different Kinds Of Home Loan Include;
Land purchase loan: The individual can use the loan to buy a piece of land.
Home purchase loan: The individual can buy any house or home that is within his or her budget.
Home improvement loan: The individual can use this loan to renovate and improve his or her house.
Home Extension loan: Here, the individual gets a loan to increase the amount of built up space at his or her house.
Home Repair loan: The individual uses the loan to pay for the cost of repair and restoration of his or her home.
Construction Home loan: Loans are acquired to cover the costs of building a house.
Types Of Mortgage / Home Loan
There are varieties of mortgage form. The most common types are 30years and 15years fixed rate mortgage. Some mortgage terms are short as 5 years while others can run 40 years or longer.
Stretching payment over years may reduce the monthly payment but increases the total amount interest the borrower pays over the life of the loan.
Fixed Rate Mortgage: Here, the interest rate stays the same for the entire loan term as well as the borrowers’ monthly payment towards the mortgage. This is also called traditional Mortgage.
Adjustable – Rate Mortgage (ARM): In adjustable-rate mortgage, the interest rate is fixed for an initial term, after which it can change periodically based on prevailing interest rates.
The Initial interest rate is often below market rate which can make the mortgage more affordable long in the short term but possibly less affordable long-term if the rate rises.
They typically have limits or caps on how much interest rate can rise each time it adjusts and in total over the life of the loan.
Interest Only loan: This involves complex repayment schedules and is best used by sophisticated borrowers. Many home ownership into financial trouble with this type of mortgage during house bubble of the early 2000s.
Reserve Mortgages: This is designed for home owners 62 or older who want to convert part of the equity in their home to cash. These home owners can borrow against the value of their home and receive the money as a lump sum, line of credit or fixed monthly payment. When the borrower die, the entire loan balance becomes due they are moved away permanently or sells the home.
Average Mortgage Rate: Here, how much meant to be paid in a Mortgage depends on the type of Mortgage which may be fixed or adjustable, it’s term which could be 20 or 30 years and interest rate at the time. Interest rates can vary from week to week and from lender to lender so it pays to shop and survey.
Mortgage may represent only a portion of monthly mortgage payment if the lender also requires the borrower to pay for the property taxes and home owners insurance through an escrow account.
Mortgage borrowers can be personal individuals mortgaging their house or they can be businesses mortgaging commercial assets.
The lender will typically be a financial institution like; bank, credit union or building society, depending on the country concerned and the loan arrangements can be made either directly or indirectly through intermediaries.
Features Of Mortgage Loan Includes:
Size of loan.
Maturity of loan.
Interest rates
Method of paying off the loan etc.
The lenders rights over the secured property take priority over the borrowers other creditors which means that if the borrower becomes bankrupt or insolvent, the other creditors will only be repaid the debts owed to them from the sale of the secured property if the mortgage lender is repaid in full first.
It is normal for home purchases to be funded by mortgage loan.
Few persons have enough reserves or liquid funds to enable them to acquire property complete.
The countries where the demand for home ownership is highest, strong domestic markets for mortgage are developed.
Mortgage can either be funded through the banking sector or through capital markets through a process called ‘securitization’ which converts pools of mortgage into fungible bonds that can be sold to investors in small denomination.
How Home Loan / Mortgage Work
The process begins immediately an individual applies to one or more mortgage lenders. The lender will ask for evidence that shows the individual borrower is capable or repaying the loan which this may be bank statement, investment statement, recent tax returns and proof of current employment. The lender as well generally run a credit checks score.
If the application is approved, the lender will offer loan to borrower up to a certain amount and at a particular interest rate. Home buyers can apply for a mortgage after they have chosen a property to buy or while they are still shopping for one.
Being pre-approved for a mortgage can give purchaser an edge in a tight housing market because, the sellers will know that they have the funds to back up their offer.
In closing, the buyer and seller agrees on a terms of the deal, which they or their representatives will meet. This is the time the borrower makes their payment to the lender. The seller will transfer ownership of the property to the buyer and receive the agreed upon sum of money, which the buyer signs the remaining mortgage documents.
Mortgage Insurance
Mortgage insurance is an insurance policy designed to protect the mortgage ( the lender) from any default by the mortgagor ( the borrower).
Mortgage insurance is a type of insurance that compensates the lenders of mortgage loans or bonds when the borrowers are not able to meet their obligation.
This is also known as mortgage indemnity guarantee (MIG) and mortgage default insurance (MDI).
This term is commonly used in loans with a loan-to-value ratio of over 80% and employed in the event of foreclosure and repossession.
The policy is paid for by the borrower as a component to final nominal rare or in one lump sum up front or as a separate and itemized component of monthly mortgage payment.
Mortgage insurance can be dropped when the lender or it’s subsequent assigns that the property has appreciated, the loan has been paid down or any combination of both to relegate the loan value under 80%.
How Mortgage Insurance Works
This insurance policy protects mortgage lenders by compensating their losses when borrowers fail to repay in a certain condition e.g. Death or default.
When mortgage insurance is purchased a master policy is issued to the beneficiary which is a bank or another mortgage lender entity.
A master policy will specify how the default should be notified when the coverage is applied or denied and other condition. The premium and coverage of mortgage insurance are determined by the value of amount borrowed.
The premium is the percentage of the loan value. It is integrated into monthly payment for loan.
The coverage of mortgage insurance falls as the mortgage dies since the principal and interest are gradually repaid by the borrower.
Mortgage insurance protects the lender of mortgage loans or bonds by paying the remaining mortgage balance in default.
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