Understanding Mortgage

Generally, whether a person is earning $60K or $100K+ per year, he/she would not be able to buy a home by paying the cost of a home at once. Thus, people look at lending companies to buy a residence for them.

On the other hand, lending companies want a solid assurance as well as security of repayment (for a set period of time). For this purpose, a form of security is used which is known as mortgage. Technically, mortgage is not a loan; it is basically a lender's security against its investment.

People Involved In Mortgages

Usually, there are three types of people are involved in a mortgage: Lender, borrower, and lawyer or solicitor. Due to its complex nature, borrowers may involve a financial adviser or mortgage broker in the transaction.

Types of Mortgages

A mortgage is calculated on the basis of Annual Percentage Rate (APR). There are several types of mortgages are available in the money market. Buyers should know which type of mortgage best suits to their needs as every type has its own pros and cons. The most common types of a mortgage are:

Fixed-Rate mortgage: This type suits best for first-time homebuyers as they don't have any previous lien or loan and are stable. In this type of mortgage, the monthly repayment installments remain the same for the entire tenure (15-year, 20-year, etc.).

Adjustable-Rate Mortgage: As its name suggests, the rate of mortgage can be adjusted in the tenure of repayment. Normally, this type of mortgage starts with low amount of installments.

Reverse Mortgage: This is relatively a new type of mortgage. It suits to old homebuyers. It is particularly good for those who are not using a home as their primary residence. In this type of mortgage, a lending company pays to homebuyers (instead of homebuyers - the reverse payment) on installment basis until the home is completely sold - the homebuyer does not need to repay it.

Balloon/Reset Mortgage: With the advantage of low monthly payments, balloon/rest mortgage is based on a 30-year amortization schedule, but the homebuyer has to repay the complete loan at the end of 5 or 7 year term, unless the buyer refinance it or choose to reset his/her mortgage with the new prevalent rates. In a balloon/rest mortgage, buyers can get a larger amount of loan as compared to the fixed-rate and adjustable-rate mortgages.

There are many options of a mortgage for homebuyers. It is important that they must be aware of all the pros and cons of the option which they are going to opt. Further, once they have decided the option, it is recommended that they must check the interest rates of at least 3-4 lending companies as the rates do vary from one company to another.

Syed Rehan is associated with AgentCampus that offers Real Estate License & Real Estate CE.

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