The concept of a mortgage loan. Home mortgage loans
Mortgage lending is the provision of money by a bank or financial institution to a borrower, secured by real estate. A mortgage loan is often called a mortgage, but it is not. Mortgage is a pledge, which in the case of non-payment of the debt by the borrower becomes the property of the lender. The latter has the right to implement it and thus satisfy its financial claims. The collateral is real estate, which at the time of lending remains in the use of the borrower. A mortgage loan is a form of financial relationship in which a pledge, that is, a mortgage, serves as a guarantee for the borrower to return the money to the lender.
Refinance home mortgage loans
Many people mistakenly think that a mortgage loan is taken only for the purchase of real estate. This is not true. Such a loan can be taken for any purpose – buying a car, paying for school or treatment, buying luxury goods. The main feature of mortgage lending is not the purpose for which the loan is made, but the fact that the loan is issued on the security of real estate. For example, a borrower draws up a loan to purchase an apartment and, as a guarantee of paying the debt, leaves the apartment to the bank as collateral. This is a standard mortgage loan. And if the bank provides him a loan without collateral, then even if the money will be spent on the purchase of real estate, this type of lending is not considered mortgage.
Mortgage lending is a long-term loan. The minimum term for such a loan is usually 5 years. And on average, a mortgage loan is designed for 15 – 20 years.
Types of house mortgage loans
Mortgage loans are classified by several indicators. So, depending on the object of crediting, there are 4 main types:
Loan for the purchase of an apartment.
Credit for the purchase of a private house. Here, a prerequisite is the liquidity of the house for the duration of the loan repayment. Therefore, banks are very reluctant to give mortgage loans for the purchase of private houses of the old building, and prefer to lend to the purchase of modern cottages.
Credit for the purchase of a room. This type of lending is practiced when buying a home in a dormitory or a communal apartment. In this case, the bank must provide the statements of neighbors that they do not claim to this living space.
Loan for the repurchase of shares in real estate. It is often used in the hereditary section of real estate. House under construction. Registration of a loan to buy an apartment in a house under construction is slightly different from the standard procedure of mortgage lending. The risks of the bank are very high here, since at the time of lending, there is no security, as such. Therefore, the loan is provided by the bank when, in their opinion, the construction is carried out by a reliable developer. So, a situation may occur when the apartment selected by the borrower, the bank refuses to take a pledge. In addition, the borrower must provide the bank with a contract of participation in the shared construction of real estate and documents confirming that the borrower has contributed part of their own funds to the construction of the house. And it should be remembered that the mortgage interest rate on housing under construction is higher than for secondary real estate.
Best mortgage loan rates
One type of mortgage lending in USA is a state-supported loan. This type of lending implies repayment by the state of a certain part of the payments. To obtain mortgage lending with state support.
The main feature of a mortgage loan with state support is that the funds are issued for the purchase of living space only in new buildings that were built with the participation of state funding. There are also restrictions on the amount of the loan.
A mortgage loan can have a fixed and variable interest rate. The fixed rate is unchanged throughout the entire loan period, and the variable rate may change depending on the Central Bank refinancing rate. But besides this reason, a change in the mortgage loan rate can be affected by a rise or fall in weighted average interest rates on interbank loans, inflation or the strengthening of the national currency and other factors that are necessarily indicated in the loan agreement. The interest rate on a variable rate is usually lower than that of a fixed one, but over time it is impossible to predict whether these percentages will increase or decrease.
Pros and cons of mortgage loans
It is very difficult to answer the question whether a mortgage loan is beneficial. This form of lending has both significant advantages and very big disadvantages. Here are the main advantages of mortgage lending:
The borrower receives in use the living space immediately after the completion of the transaction. And this is the main advantage of a mortgage based loan. You use the accommodation now and pay later.
If the family lives in a rented apartment, the rent goes from the family budget to the landlord’s pocket. With a mortgage loan, each payment approximates the time of purchase of housing from the mortgage.
If the borrower has preferential credit conditions, the housing will cost him much cheaper.
Real estate is a great way to invest money. After all, if a national currency collapses, similar to what was at the end of 2014 in the USA, then on condition of a dollar mortgage loan with a fixed rate, the borrower purchases an apartment at a very favorable price.
Well, now the disadvantages of a mortgage based loan. They are few, but they are very weighty:
Long payment term. At the same time, many banks do not provide early repayment service in order to earn more.
Psychological factor. Throughout the life of the loan, the person does not leave the thought of having to pay the bank a fee in time.
Big overpayment. Since the bank takes into account all possible risks when issuing a loan, since the transaction is carried out for a long time, the overpayment can be 200%. And sometimes the borrower overpays 250 – 300% of the loan amount.
Mortgage loans are not issued to all citizens and not available for all types of residential real estate.