What is a mortgage?

Mortgages is a loan by a bank or other financial institutions that a person can use to finance the purchase of a home. A mortgage is different from other loans like personal or student loans. Since the bank can use your house as collateral, meaning if you don't pay the bank back on time they can take possession of your home.For your convenience we will explain it to you in a simple way. In simple words mortgage is a legal agreement between money lender and individual (gainer), which gives the property rights in favour of money lender, in return the money lender earns profit in a form of interest. The rate of interest has already been discussed in agreement. Here if the debtor fails to pay back to lender the agreement will turn into the favour of the lender and it transfer the ownership to the money lender. Her mainly the term money lender refers to the bank or other financial institutions. So thus the mortgage works, both sides will have profit. The money lender will earn the in term of interest rates and the debtor can use the property with the artificial ownership of property until the amount of has not been paid.   

We will explain you with the example. Here's Rahul and Zeel are newlyweds looking to buy their first home. After a long search they find the perfect home with the not so perfect price tag of five hundred thousand dollars more than they have in the bank. What are they to do Rahul and Zeel head over to the bank, the banker suggest that they take out a mortgage to finance the home. The banker ask them ' how much they are willing to put down as a down payment? ‘The down payment is the amount that Rahul and Zeel pay up front. Usually its needs to be at least around twenty percent of the price of the home. But Rahul and Zeel have been saving for a while and decide to put down a hundred thousand dollars. Meaning they will need to borrow an additional four hundred thousand dollars to buy the house.

The banker of use Mark and Lisa’s credit reports and income statement and grants them a four hundred thousand dollar mortgage at a fixed rate of five percent with a five-year term and a 40 years amortization period that means Rahul and Zeel must pay five percent interest rate to the bank per year. The fixed five year term means Rahul and Zeel are locked into this rate for five years. Regardless of whether the interest rates go up or down conversely they could have taken a variable or floating rate which goes up and down with the interest rates. Fixed rates are considered to be the safer choice but are often a little more expensive than variable rates. The amortization period is the length of time Rahul and Zeel will take to pay off the loan and own their home entirely. So with monthly interest and principal payments they will be the sole owners of their home in 40 years.

The advantages to taking the mortgage should be pretty clear. Instead of putting money into a landlord's pockets by paying rent every time they make a mortgage payment. They own a little more of their home currently the house is split between equity what Rahul and Zeel own and debt. What the bank owns every time they make a payment and they turn some of their debt into equity. Also Rahul and Zeel could make a nice profit if the value of their home appreciates. For example imagine Rahul and Zeel get an offer to sell their home for six hundred thousand dollars the day after they bought it. Rahul and Zeeland the bank aren't partners they don't have to split the profits. So let's say they take the offer and sell the house. They collect six hundred thousand dollars from the buyer and pay back the four hundred thousand dollar loan to the bank. Just like that they doubled their $100,000 investment to learn more about mortgages and other topics of mortgage check out our other posts.