A mortgage loan is a term applied to obligate a property to the lender for ensuring liabilities settlement security. In other words, you purchase a property ( usually a real estate) by paying a small amount of its value and joining an agreement in which you promise to pay the rest of the fee in small amounts, over some years. Otherwise, the loaner can take over the property. For example, you buy a house from a bank, and you pay 10% of the price at first. Signing a contract, you promise to pay the rest 90% over the years. If you cannot make the payments on time and settle the remained money, the bank can possess the house.
Mortgage loan Pros and Cons:
Mortgages are essential items in Americans’ financial life. Because of the high house prices, possessing a house has become a dream for most Americans. A mortgage loan is a magic that lets you own any asset you want. However, it can be risky for both mortgage loaner and the borrower. The borrower can lose the asset in case of a disability to make payments. The mortgage loaner takes a risk too since there is no warrant that the borrower can settle the liabilities.
A mortgage loan in the USA:
In the USA, a mortgage loan agreement contains two different items. A promise contract by which the borrower promises to pay back the debt according to the monthly payment regulations in the agreement. And the evidence of the debt security usually assigned together.
The federal government has provided programs to foster mortgage offering organizations under specific rules.
Types of mortgage loan
There are two types of mortgage:
As it is clear, in a fixed-rate mortgage, the interest rate remains stable for the whole payment period. This type of mortgage is more common in the USA
In a floating rate, the mortgage loan’s interest rate is a fixed amount at first, but it can decrease or increase during the payment period according to the market index. The floating rate mortgage loan reduces the creditor’s risk but adds to the borrower’s risk.
How do mortgage loans work?
Since 1970 by readjustment in mortgage laws, the base of your mortgage agreement depends on the value of the property you buy. Usually, banks lend 90% of the asset’s value. And you settle the remained amount of debt (usually home loans) in a down payment. Although these debts are commonly used for home purchase, you can buy other properties using your real estate as collateral next to the bank. Since the creditor and borrower plan monthly payments according to the base (value of the property) and interest rate, the debt decreases as time passes.
Mortgage Loan rate & Credit Score
The first items any creditor would consider before lending money are your credit score and your credit reports. Your credit score can affect your mortgage loan’s interest rate as well as the creditor’s opinion about lending money to you. If you got a bad credit score, you might pay more interest rate.
The interest rate matters since a 0.5% lower interest rate can cause around 20000$ difference on 30 years 200000$ mortgage. Therefore, we highly recommend you to check your credit score before applying for any mortgage. You can get your credit reports from each one of the three main credit agencies. For a more accurate report, you would better get reports from each one at the same time. Since the credit agencies offer free credit reports only once a year, you can contact Enrich Financial to get accurate and free reports. If you noticed a low credit score on your credit report, our suggestion is to boost your credit score before requesting a loan. You can find useful tips for credit score promoting on enrichfin.com.
There are different types of mortgage loan repayment methods in the USA. before describing the repayment methods, you should know the terms principle and the interest:
- Principle: is the total net amount of your loan
- interest: the fee the lender charges you because of the debt
Mortgage loan repayment methods are:
In the interest-only settlement method, you agree to pay monthly interest only. The principal would be paid on a specified date or through a lump sum payment.
In the principal repayment method, the borrower ensures the lender that he or she is saving money through investigation or savings to pay the principal amount back entirely at a time. If you are a mortgage loan borrower and you use this method, you have to make sure that your investigation and saving plans are on track.
In a combined settlement program, you agree to repay the debt part on interest-only and some part on the total repayment. For example, you pay several first months only the interest, and you repay the remained amount in a one-time payback.
Mortgage loans are very critical in Americans’ lives since it is impossible to afford a house without them. In simple words, the creditor takes your property as collateral for the home loan.
You agree to pay the amount of debt (up to 90% of the asset’s value) in monthly payments with specified interest rates. The interest rate can change according to market demand. Often the interest rates are set considering the principle ( the amount of the asset’s price you have paid), the monthly payments decrease by the elapsed time increase. The most common interest rate on mortgage loans is fixed interests in the united states. However, adjusted rate mortgage loans are available, too.