Here’s what you need to know
A mortgage is money that a lender loans you in exchange of a property that you own. Your property is not a repayment, just an assurance of repayment. The repayment plan depends on the terms that you and your lender have agreed on, the rates and the timeline may differ on each loan. With this, buying a house is much easier and more affordable.
Mortgage loan consists of two major parts which is repaid monthly. The principal, which is the amount of money, loaned to you by the lender and the interest, which is the amount your lender gets in return for letting you use their money. The principal is divided by the repayment timeline that you have agreed on paying and the interest is added up to that. So, it is important to find a lender that has the lowest interest rate to maximize your loan.
Repayment timeline are often as long as 15, even 30 years. This is because mortgage loans are usually of large amounts and 5 year repayment scheme is not just possible. Monthly mortgage payments consist of payment for the principal and its interest ñ the first few years, you will be paying more for the interest rather than for the principal. The interest is based on the interest of the pending amount to be paid back, so in the earlier part of the loan, you will be paying large amounts to the interest. But as the years progress, the interest will keep decreasing as well.
But this is not all the borrower needs to pay ñ they also need to pay for the taxes and insurance monthly. If and when a borrower fails to pay at least 20% of the amount to be paid, the lender will consider your account to be risky. They will then require you to pay an escrow for the future tax and insurance payments. Escrow is an arrangement in which your money is deposited in an account under an escrow agent pending the satisfaction of condition. Meaning, the escrow agent will keep the money and release it to the lender every month for tax and insurance payments. The lender requires this to lessen the monthly payments, therefore, paying up will be easier for the borrower.
If the borrower still fails to pay 20% of the amount, the lender can also require another payment known as private insurance to the borrower. This amount is required to borrowers that lenders consider as very risky. The private insurance is not paid all at once, it is divided and added to the principal and interest and should be paid for monthly. If you still cannot pay up, the lender will get your property and whatever else you owe them.
It may sound a little depressing, but the borrowers know the risk way before they signed the deal. Whatever the case may be, if you know how to manage your finances well, mortgages can be your best friend. It can make a home buyerís dreams come true ñ but with a price.
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