Are you thinking about buying your first apartment? Did you know that one of the safest and most viable financial options is a mortgage loan? If you still don’t know how mortgage loans work, don’t worry, it’s completely normal to feel overwhelmed when it comes to terms like fixed or variable rate mortgages, among others.
Therefore, at GroundBanking, we will explain what a mortgage loan is and how to obtain one.
What is a mortgage loan?
A mortgage loan is, in a nutshell, an amount of money that you get from a financial institution so that you can purchase a piece of land or property. Many people do not have the full amount of the sale price of a property in cash; therefore, they pay a deposit which is usually 10% of the sale price. They then request the rest from a mortgage lender such as a bank.
How does a mortgage loan work?
As we mentioned, a mortgage loan is a loan against your property that you will then repay on a monthly basis. The financial institution that grants the mortgage loan will calculate an appropriate repayment amount each month, which will include the interest that they will charge you on the loan.
Most mortgage loans have a repayment period of around 10 years, but depending on the lender, you can get them for shorter or longer periods. This means that the total amount of the loan, including interest, has been divided by the years it will take you to pay it back, and that is what you will pay each month.
In order to obtain a mortgage loan, certain requirements must be met , so that financial institutions are sure that you are a good payer. Therefore, the person who obtains a mortgage loan will most likely be someone with a stable and reliable income, and a good credit score.
Mortgage Terms
When you are in the process of buying a home, you may hear certain terms that you are not familiar with, which is why we have created this list of the most common mortgage terms .
Amortization
The term amortization, also known as loan principal, is a portion of each monthly mortgage payment that is used to pay interest, while another portion is used to pay the loan balance.
Amortization refers to how those payments are spread out over the life of the loan. During the first few years, most of the payment goes toward interest, and as time goes on, it ends up paying off the loan.
Down payment
The down payment is the money that is paid in advance to purchase a property. In most cases, a down payment is required to obtain a mortgage loan.
Security deposit
Part of owning a property is paying property taxes and homeowner’s insurance. Most financial institutions set up an escrow account to pay for these expenses. These escrow payments are added to your monthly mortgage payment.
Not all mortgage loans include an escrow account. If your loan doesn’t, you’ll have to pay property taxes and homeowners insurance yourself. However, most banks offer this option because it allows them to make sure property tax and insurance bills are being paid correctly.
Rate of interest
An interest rate is a percentage that indicates how much you will pay each month as an instalment for the money borrowed. There are two types of mortgage interest: fixed rates and variable rates.
Fixed interest rates are the same for the entire life of your mortgage. That is, if you have a 30-year fixed-rate loan with 4% interest, you will pay that interest until you pay off your loan.
On the other hand, variable interest rates change depending on the market. Most variable rate mortgages start with a fixed interest rate period. After the fixed interest rate period ends, the interest rate adjusts up or down every 6 months or a year.
Mortgage Process
There are several steps to follow when you are trying to buy a property with a mortgage loan , below is a summary of what you will need to do.
1. Get approval
Before you start searching for your dream apartment, it’s a good idea to get approval from your financial institution for a mortgage loan. When you get approval in advance, you can know the exact amount you qualified for, so you won’t waste time looking for properties that are out of your budget.
Mortgage lenders use a variety of terms, such as approval, pre-approval, and pre-qualification, to describe the initial approval process. It’s important to look for a lender that will verify most of your information up front so you can make a solid offer.
2. Search for a property
Once you have approved credit, the fun part begins. You can contact a real estate agent to start viewing properties that fit your requirements and budget.
Real estate professionals can help you find the right home, negotiate the price, and take care of all the paperwork.
3. Close the mortgage loan
Once your loan is fully approved, a meeting will be scheduled with the financial institution representative and the real estate agent to close the loan and take possession of the home. At closing, you will pay the down payment and closing costs and, finally, sign the mortgage papers.
Now you know what a mortgage loan is, how a mortgage loan works, and the process you must follow to acquire your dream property. This way, you will be better informed when you are ready to buy your first property. We hope this information has been helpful to you!
