What is a Mortgage Loan?
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and theencumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.
A home buyer or builder can obtain financing either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.
In many jurisdictions, though not all (Bali, Indonesia being one exception, it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed.
The word mortgage is a Law French term meaning "dead pledge," apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.
Basic concepts and legal regulation
According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest as security or collateralfor a loan. Therefore, a mortgage is an encumbrance (limitation) on the right to the property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property.
As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time, typically 30 years. All types of real property can be, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.
Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential and commercial property . Although the terminology and precise forms will differ from country to country, the basic components tend to be similar:
Property: the physical residence being financed. The exact form of ownership will vary from country to country, and may restrict the types of lending that are possible.
Mortgage: the security interest of the lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchasehome insurance and mortgage insurance, or pay off outstanding debt before selling the property.
Borrower: the person borrowing who either has or is creating an ownership interest in the property.
Lender: any lender, but usually a bank or other financial institution. Lenders may also be investors who own an interest in the mortgage through a mortgage-backed security. In such a situation, the initial lender is known as the mortgage originator, which then packages and sells the loan to investors. The payments from the borrower are thereafter collected by a loan servicer
Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size.
Interest: a financial charge for use of the lender's money.
Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is arguably no different from any other type of loan.
Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system.
Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country.
Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds). The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization).
Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances.
Mortgage loan types
There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements.
Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.
Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.
Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.
Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.
The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable-rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In many countries (such as the United States), floating rate mortgages are the norm and will simply be referred to as mortgages. Combinations of fixed and floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period.
In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. Therefore the payment is fixed, although ancillary costs (such as property taxes and insurance) can and do change. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan,
In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve.
The charge to the borrower depends upon the credit risk in addition to the interest rate risk. The mortgage origination and underwriting process involves checking credit scores, debt-to-income, downpayments, and assets. Jumbo mortgages and subprime lending are not supported by government guarantees and face higher interest rates. Other innovations described below can affect the rates as well.
How to utilise your mortgage loan
The home is a valuable asset that most home owners acquire over time. Trading it for cash with a mortgage can be a less expensive way to avail of a loan, but it should not be used lightly. It makes sense to shop carefully for mortgage loan quotes before borrowing, and to prioritise the use of the mortgage loan. After all, a mortgage loan uses the property as collateral, so it should only be used to finance purchases that are worth that risk.In general, a mortgage loan should be used when the following conditions are met:
The purchase is long-term in nature.
Loan quotes show a distinct interest rate advantage compared with other methods of financing.
A repayment plan has been carefully budgeted.
Given below are some examples of possible utilisation of your mortgage loan:
Debt consolidation: This is a common reason why a mortgage loan may be availed of, since such loans generally carry lower interest rates than other loans like personal loans. Debt consolidation allows borrowers to pay less interest by securing their debt with their home.
Home improvements: With the festive season around the corner, home improvements can be a way of adding value to a home or increasing its marketability. Using a mortgage loan to add space may be cheaper and involve less hassles than taking an unsecured loan. As in unsecured loan The term of repayment for an unsecured loan is shorter, as compared to mortgage loans, which in turn results in a high EMI.
For your children's higher education: While not investing in the house itself, money from a mortgage loan can be utilised for your children's higher education because it represents an investment that has long-term benefits and should produce an eventual financial return. Mortgage loan financing rates compare favourably with most types of private education loans. However, there are many forms of subsidised or assisted financial aid for college, so it would be wise to compare mortgage loan quotes with other education loans before committing.
Starting a business: Banks and finance institutes offering business loans are notorious for the number of hoops they make borrowers jump through with regards to higher rates of interest and short durations. Mortgaging a property, if available, can be more feasible in terms of the rate of interest and the repayment term. Of course, you should put together a business plan before attempting entrepreneurship; receiving a mortgage loan to start a business is likely to take much less time, because valuing a home is easier than evaluating a business.
For medical treatments: With the cost of medical treatments going through the roof, even the well-insured can be hit with more than they can handle -- many treatment centres today want a significant portion of payments to be made up-front. A mortgage loan may be the best way to get top-rated care sooner for a serious condition.
Down payment for property investment: Finance for the down payment of an investment property is a good option, as a boom in the property market can give good returns on the investment made at this point, while paying low interest rates.
Banks Offering Mortgage Loans
HDFC
Bank of Baroda
Citybank
Bank of India
State Bank of India
source:www.wikipedia.org and http://www.rediff.com
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and theencumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.
A home buyer or builder can obtain financing either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.
In many jurisdictions, though not all (Bali, Indonesia being one exception, it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed.
The word mortgage is a Law French term meaning "dead pledge," apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.
Basic concepts and legal regulation
According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest as security or collateralfor a loan. Therefore, a mortgage is an encumbrance (limitation) on the right to the property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property.
As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time, typically 30 years. All types of real property can be, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.
Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential and commercial property . Although the terminology and precise forms will differ from country to country, the basic components tend to be similar:
Property: the physical residence being financed. The exact form of ownership will vary from country to country, and may restrict the types of lending that are possible.
Mortgage: the security interest of the lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchasehome insurance and mortgage insurance, or pay off outstanding debt before selling the property.
Borrower: the person borrowing who either has or is creating an ownership interest in the property.
Lender: any lender, but usually a bank or other financial institution. Lenders may also be investors who own an interest in the mortgage through a mortgage-backed security. In such a situation, the initial lender is known as the mortgage originator, which then packages and sells the loan to investors. The payments from the borrower are thereafter collected by a loan servicer
Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size.
Interest: a financial charge for use of the lender's money.
Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is arguably no different from any other type of loan.
Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system.
Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country.
Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds). The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization).
Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances.
Mortgage loan types
There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements.
Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.
Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.
Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.
Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.
The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable-rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In many countries (such as the United States), floating rate mortgages are the norm and will simply be referred to as mortgages. Combinations of fixed and floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period.
In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. Therefore the payment is fixed, although ancillary costs (such as property taxes and insurance) can and do change. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan,
In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve.
The charge to the borrower depends upon the credit risk in addition to the interest rate risk. The mortgage origination and underwriting process involves checking credit scores, debt-to-income, downpayments, and assets. Jumbo mortgages and subprime lending are not supported by government guarantees and face higher interest rates. Other innovations described below can affect the rates as well.
How to utilise your mortgage loan
The home is a valuable asset that most home owners acquire over time. Trading it for cash with a mortgage can be a less expensive way to avail of a loan, but it should not be used lightly. It makes sense to shop carefully for mortgage loan quotes before borrowing, and to prioritise the use of the mortgage loan. After all, a mortgage loan uses the property as collateral, so it should only be used to finance purchases that are worth that risk.In general, a mortgage loan should be used when the following conditions are met:
The purchase is long-term in nature.
Loan quotes show a distinct interest rate advantage compared with other methods of financing.
A repayment plan has been carefully budgeted.
Given below are some examples of possible utilisation of your mortgage loan:
Debt consolidation: This is a common reason why a mortgage loan may be availed of, since such loans generally carry lower interest rates than other loans like personal loans. Debt consolidation allows borrowers to pay less interest by securing their debt with their home.
Home improvements: With the festive season around the corner, home improvements can be a way of adding value to a home or increasing its marketability. Using a mortgage loan to add space may be cheaper and involve less hassles than taking an unsecured loan. As in unsecured loan The term of repayment for an unsecured loan is shorter, as compared to mortgage loans, which in turn results in a high EMI.
For your children's higher education: While not investing in the house itself, money from a mortgage loan can be utilised for your children's higher education because it represents an investment that has long-term benefits and should produce an eventual financial return. Mortgage loan financing rates compare favourably with most types of private education loans. However, there are many forms of subsidised or assisted financial aid for college, so it would be wise to compare mortgage loan quotes with other education loans before committing.
Starting a business: Banks and finance institutes offering business loans are notorious for the number of hoops they make borrowers jump through with regards to higher rates of interest and short durations. Mortgaging a property, if available, can be more feasible in terms of the rate of interest and the repayment term. Of course, you should put together a business plan before attempting entrepreneurship; receiving a mortgage loan to start a business is likely to take much less time, because valuing a home is easier than evaluating a business.
For medical treatments: With the cost of medical treatments going through the roof, even the well-insured can be hit with more than they can handle -- many treatment centres today want a significant portion of payments to be made up-front. A mortgage loan may be the best way to get top-rated care sooner for a serious condition.
Down payment for property investment: Finance for the down payment of an investment property is a good option, as a boom in the property market can give good returns on the investment made at this point, while paying low interest rates.
Banks Offering Mortgage Loans
HDFC
Bank of Baroda
Citybank
Bank of India
State Bank of India
source:www.wikipedia.org and http://www.rediff.com
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