So, what is a mortgage?
Unlike a normal loan, a mortgage is specifically tied to the house you’re buying. You usually borrow a percentage of the value of that property repaying the amount you borrowed plus the interest charged by the mortgage lender. If you fail to repay your mortgage then your house could be taken away and sold to cover the loan taken out.
When you’re buying a house for yourself their are two main types of mortgage to choose from.
With a repayment mortgage you gradually repay the amount you borrowed, this is known as the capital.
Each month some of what you payed goes towards paying of the capital while the rest covers the interest. By the end of the mortgage term, usually 25 years, you will have repayed everything you borrowed.
Interest only Mortgage
An interest only mortgage usually has lower monthly payments because you are not paying off the actual money you borrowed just the interest.
It’s up to you to make arrangements to pay off the capital at the end of the term by paying a seperate amount into an investment for example.
New mortgages usually charge you a lower rate of interest in the first few years to intise you in. This can be fixed or variable.
A fixed rate is usually slightly higher but gives you the security of a regular peayment each month.
On a variable rate mortgage the monthly repayment can change if the interest goes down you could pay less but there is a chance it can go up leaving you to pay more each month.
What ever type you decide to use you can always use different mortgage calculators
What is a mortgage in principal?
A mortgage in principal in simple terms is a pre-approvment from the mortgage lender to say they’re happy to lend you the mortgage based on the information you’ve provided, subject to backing that information up in documentation and subject to a satisfactory valuation on the property. If they are all okay then you’ll get a mortgage offer.
How Mortgages Work:
The 4 factors that make up a home mortgage – P-I-T-I
Let’s run through the 4 factors that go into a mortgage payment. If you understand the acronym of P-I-T-I, that simply stands for Principil, Interest, Taxes and Insurance. If you’re a real estate investor you know these 4 letters like the back of your hand and if you don’t let’s run through these very quickly.
What is Principal?
So, P stands for principal and this is just simply the amount of money you owe the bank for lending you to be able to purchase the house that you’re moving into.
The example we are going to be using for this article is:
$350 000 house and we are going to be puting 20% down. So the down payment amount if we are putting down 20% on $350 000 and the mortgage amount is going to be $70 000 for the down payment and you owe $280 000 on the mortgage.
What is Interest?
Interest is simply just the rate at which you are borrowing the money from the bank. You’re paying the bank to borrow their money that is how the bank is compensated.
The higher risk you are, meaning the lower credit score you are, the higher the rate that the bank needs to make in order to compensate themselves for taking on risk. In other words you are going to get a higher interest rate on your mortgage.
So, higher risk, higher rate, lower risk, lower rate. The better your credit the lower the interest is going to be.
T = Taxes
Property taxes are used to help fund schools, infrastructure, government workers and so on. That is why property taxes is part of owning a home. So, these taxes are typically calculated on the assesed value of the home and the lender can actually roll these into your mortgage payment.
They’re going to be escrowed, meaning they’re going to be set aside in a special account and once they’re due, typically twice a year, that’s going to be paid to the municipality that they’re owed.
Taxes will actually will get rolled into your mortgage payment in most cases.
I = Insurance
Finally we have insurance.
Property insurance is if for example a tree falls on your house and it’s just like car insurance, you are going to get compensated after some sort of deductible and you pay for it monthly typically.
However there is this other thing called PMI which is private mortgage insurance. So typically if you put less than 20% down on a property, PMI = Private Mortgage Insurance is their to allow the lender to get some breathing room if you will.
This dosen’t go towards the principal, as I mentioned before, of your payment it just allows the bank to be able to turn your property into a security and sell that mortgage to other bigger banks and it also gives them a little less risk for taking on that mortgage if you don’t have 20% down.
Some cases lenders will allow you to put less money down with no PMI.
FAQ about Mortgage:
Can there be several mortgages on the same home?
Yes, there may be several mortgages. In this case, there is also a sequence that indicates the relationship between the different mortgages.
Can a mortgage deed be used several times?
The mortgage deed is the proof that a mortgage exists. When a mortgage is taken out, the mortgage deed must be handed over to the bank, which is thus the security for the loan.
If the entire loan is repaid, the bank must return the mortgage deed, which can then be used on other occasions to be able to mortgage the property.
How to apply for a mortgage?
It is the property owner who applies for a mortgage and this must then be done in writing. In some cases, the bank helps with this application, but it is still the property owner who is the applicant.
If the application is made via a representative, the bank’s name and contact details must be stated.
The information that must be sent depends in part on whether the person is married or not.
Married – In this case, the spouse must also approve the mortgage.
Cohabitant – If the home is counted as common property, a cohabitant must also approve the mortgage.
Divorced – If a couple has owned a home together and then divorced, the person who now owns the home may need to prove their ownership.
This is despite the fact that the person may have previously had legal title to the home.
To prove this, copies of the division of property documents and a certificate from the district court are sent, which proves when the application was received by them regarding the divorce.
The information stated in the application includes the property designation, social security number of the property owner, mortgage amount, any consents and signature and name clarification.
What is meant by “mortgaging”?
If a mortgage is lost, that mortgage must be “killed”. It can take quite a long time and also entails some costs. Since all mortgages today are digital, there is no risk that they will get lost. But in older homes, there are still mortgages that are only available in physical form.
Is it possible to change a mortgage?
Yes, it is possible to change information on a mortgage. It can be, for example, that a mortgage should apply to several different properties, that a mortgage deed is exchanged for several, that several mortgages are brought together into one, etc.
Changes can be made by submitting the same form as when applying for a mortgage and stating the desired change.
If you wanna learn more than I recomend this very good video I found on Youtube.
It’s by Marco – WhiteBoard Finance, very informative and easy to understand, everything you need to know about mortgage 101 is in that video so check it out.