A mortgage is defined as a loan secured by real property through the use of a promissory note which affirms the existence of a secured loan and the lien against the realty through the granting of a mortgage. In simple words, a mortgage is a loan that is secured by a property or house and paid in installments over a specific period of time. The mortgage basically secures your promise that the money borrowed will be repaid to the lender. For many people, a mortgage is the biggest financial obligation they will ever have.
There are two parties to a mortgage: the borrower and the lender. A mortgage document creates a recorded lien on the property, which severs as a lender’s security for the debt. Ownership of the secured property cannot be transferred until the debt is paid off to release the lien.
The two single biggest factors affecting the cost of a mortgage loan are the interest rate and amortization period.
Interest: interest may be fixed for the life of the loan or change at certain specified periods.
Term: mortgage loans have a maximum number of years after which an amortizing loan will be repaid.
There are many different types of mortgages so it is important to become an educated consumer. Over the last couple of years, many home buyers were impacted by predatory lenders and given mortgages they simply could not afford during the ensuing housing crisis. Make sure the mortgage fits both your short term and long term goals!
The two basic types of amortized loans are fixed rate mortgages and adjustable rate mortgages (ARM).
In a fixed rate mortgage, the interest rate remains fixed for the life of the loan (usually 30 years). Payments of principal and interest should not change over the life of the loan, although additional costs such as property taxes and homeowners insurance will change.
In an adjustable rate mortgage, the interest rate is fixed for a short period of time, then will periodically (usally annually) adjust up or down based on a market index.
Before you decide to obtain a mortgage there are a couple of things to consider:
- Are you in a secure financial position to make the mortgage payments? Use this mortgage payment calculator to help you decide.
- Do you have a cash cushion in the event of a financial emergency? Experts suggest your emergency fund should cover at least six months of total living expenses.
- Know the risks involved (forebearance, foreclosure, short sales, credit problems) should you not be able to pay your mortgage in the future.
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