Have you ever heard of a mortgage? You must have probably heard about it when someone is talking about their new home or their new property. Well, did you ever wonder what exactly is a mortgage? Or how does it work? In this article, we simplified what the definition of it is along with how it works for you.
A mortgage is basically a type of loan that you can get from a bank or any other financial service institution to finance the purchase of your new home. At the very heart of it, a mortgage is nothing but a loan secured by real estate. At some point in your life, you have probably received or given a loan to somebody. Maybe it was something very simple like loaning your bike or maybe loaning your friend 10 bucks but just realize a loan is a loan at the end of the day.
Let’s just consider this example for the day, you needed to buy a bike for work, you needed a form of transportation but you had no money. So, you asked your roommate for the money to buy the bike. All loans come with certain terms so, let’s say your roommate wanted his money back in a year with four percent interest with monthly payments of 50 dollars. And the key point is that if you fail to do so by any means he gets to keep your bike.
A mortgage is no different except that it involves real estate. If you violate the terms of the mortgage or the loan they’re going to take back the piece of real estate as opposed to a bike and although there are many different types of mortgages they normally have these terms for a long period say 30 years at a certain yearly interest rate say 4%, monthly payments and lastly they are amortized over this time period. One can also have a mortgage renewal if they need it in the future.
Now focus completely here to understand amortization. In our bike example, our roommate wanted us to pay equal amounts each month rather than a lump sum of the money we borrowed. That is the key point of amortization. So, with the amortization, you are paying off a little bit of the money borrowed and a little bit of the interest every month so by the end you will hopefully own the bike. Whereas with a non amortized loan you will have to pay the lump sum and the interest at the end of the year when the loan comes due.
A very simple mortgage example would be, you’re buying a 100,000 dollar house and you’re getting a yearly rate of 3.9% interest and it’s amortized for over 30 years. Now, if you open a mortgage calculator on the internet and put in those numbers it will give you 47s dollars a month as the answer. Home loans, bike loans, mortgages are almost the same and one strict piece of advice for anyone would be getting a loan with the most favorable terms especially with home mortgages. Because they are long and very expensive.
Banks actually try to scrutinize you financially so to get the most out of your loan you need to negotiate the best terms and get some professional help that you think would benefit you somehow.