What is Mortgage Loan?
What is mortgage loan? A mortgage loan is type of a loan that financial institutions offer to prospective buyers to enable them to acquire a property, be it a house, flat or commercial space. It is one of the most important financial instruments of the banking and financial systems. A mortgage loan is approved and disbursed against mortgaging the property bought. Usually all the mortgages are registered and made legally binding. Generally, the mortgage loans attract lesser interest rates compared to commercial lending. These types of loans do not fall into non performance assets (NPAs) of the lender as the property is pledged against the loan.
There are many types of loans under mortgage category. Among these fixed interest rate and variable interest rate mortgage loans are the most popular and account for major share of mortgage loans.
A fixed rate interest mortgage loan
An interest rate fixed mortgage loan is offered at a fixed interest rate. It remains fixed throughout the loan tenure in general. This type of product permits the prospective buyer to have knowledge of his liability before acquiring the property. This would enable him to apportion his loan instalment and loan duration.
The fixed rate interest loan attracts higher interest rates compared to adjustable rate interest loans. This type of mortgage loan is preferred if economy is not very strong and the interest rates are going to fluctuate.
A variable interest rate mortgage loan
A variable interest rate mortgage loan (alternatively known as adjustable rate interest mortgage loan) works on the principle of adjusting the interest rate according to the financial performance of the economy and other local factors. In these types of loans the interest rate bases itself on a floating concept and is allowed to change according to the financial condition of the country and the lending institutions. These types of mortgage loans are preferred in a performing economy where interest rates are likely to fall.
Adjustable rate interest mortgage loan carries lesser interest rate than fixed types and thus enabling the consumer to carry lesser liability in the beginning. This enables the buyer either to go for expensive properties than what he could when interest rates are fixed. Besides, such loans attract buyers to acquire properties as they afford them to pay the low monthly payouts in the beginning when their incomes are lesser.
Adjustable rate mortgage loans are relatively complex and a sudden spurt in the economy makes the borrower to become vulnerable. Recently, finance companies have come up with a mixed variety where a consumer is offered a combination of fixed and floating rates of interest on mortgage loans.
Other mortgage loan varieties
Apart from these two popular mortgage loans, there are other varieties as briefly discussed below.
Subprime mortgage loans and predator loans are mainly meant for those with poor credit record. These types of loans carry higher interest rates, processing fees and other charges because of the risk of default is high
Jumbo mortgage loan is a loan that is offered to the customer disproportionate to credit worthiness enabling him to go for a bigger property. Such loans are generally offered to the customers with good credit record and where the property is expected to appreciate in due course of time making the loan less risky.
Some important aspects of mortgage loans
- All the mortgage loans will have monthly payments in the form of equated monthly instalments or EMIs. The EMI includes a small portion of principal repayment, interest charges, applicable taxes and insurance components.
- Generally all the mortgage loans require the buyer to bear at least 15% of the total project cost as initial payment to the property being bought. Besides, foreclosure also attract penalty. Recently, RBI has issued a guideline not to charge foreclosure penalty on mortgage loans in India.
- Another most important of aspect mortgage loans is the “amortization schedule”. It provides the borrower with the actual cost of buying the property with complete breakup of principal, interest, taxes and insurance. While taking a mortgage the borrower should pay serious attention and discrepancies if any should be brought to the notice of the lender immediately.
- While mortgage loans are very attractive to acquire a property, these loans have to be tread with caution as borrower tends to jump to a higher loan than he can really afford sometimes.
- Before seeking mortgage loan, it is always good to seek credit rating and pre-approval while scouting for a property. A pre-approval in hand means that you are practically ready to close the deal and you can seek better bargains from the real estate sellers.
While there will be several sellers of properties, lenders tied up with the property sellers, it is you who is borrowing and since it is generally once in a while that you would end up taking a loan, you should look for the better deals depending on your capability of repayment. You should take time to search and close the deal on better terms. You should always read the loan approval document and understand the fine print. If needed do not hesitate to seek clarifications from the lender. You should not shop for property and the mortgage loan in haste or else you may end up in bad debt.