Define Mortgage – The Mortgage Definition
A mortgage loan is a loan that is made to help finance the purchasing of a real property.
The interest rates and specific payment periods are predetermined. The borrower, or the person who needs the money, is called the mortgagor. The lender, the person who gives the loan, is called the mortgagee. During loan giving process, the borrower is also required to give the lender some kind of lien on the property as security (collateral). The lien will get inactive once the loan gets fully paid off. A lien is basically a legal claim for a property which is set for loan.
Define Mortgage History
It is a common misconception that mortgages have been around for a long long time. After all, who can afford to pay for a house at once, right? Well, in reality it was not until the 1930s that the concept of mortgage came into being. Another important fact is that it wasn’t the bankers who came up with the idea, instead it were the insurance companies who are behind the mortgage definition. They did not do this for making money. Their main motive behind this idea was to gain the ownership of properties whose payments could not be afforded by their owners. The modern version of mortgages was introduced in 1934 as a mode to help the country out of Great Depression. Before 1930, data shows that only 4 out of 10 people owned a house. We can’t blame them considering the fact that they were supposed to pay the whole amount together.
How Does Mortgage Work
So how does this mortgage process work? Let’s say you are interested in buying the property that costs x amount. First, you will be required to pay some kind of down payment. This amount is the sum that you are required to pay up front. The more your down payment, the less you would have to borrow. The general amount is 20%, but some mortgages let you pay 2 to 5% as well. And there are even mortgages with 0% payment but banks are now less likely to give them. With the latter case, off course, the monthly payment will be higher.
The monthly payment, is basically consisted of 4 things. These are principal, interest, taxes and insurance. You can remember them with the famous acronym PITI. Principal is the total amount, after the down payment that you borrow from the lender. Interest is the amount that the mortgagee charges for loan. Taxes basically refer to your property tax. Insurance refers to some kind of property insurance that most lenders require you to have. This will protect against any damages, or loses from natural disasters, or theft.
Define Mortgage Types
Now after the mortgage definition, some history and explanation how mortgage work we have to define mortgage types. There are several types of mortgages.
- One type is a Fixed- Rate Mortgage. This is an amortizing mortgage where the interest rate remains the same. These are usually most expensive due to the interest rate risk. In this type of mortgage, the only thing that changes on a monthly or yearly basis are the property taxes and insurance
- The second type is Adjustable- Rate Mortgage. Interest rate changes in this one, in most cases once a year. This change will affect your monthly payments. What makes this type most attractive is the fact that the initial rates are lower than fixed rate mortgage. People who think they will be selling their house within a few years of purchase are users of this type. Here are some important factors to look for before signing that ARM agreement. It is important to look at how often the interest rate changes. Look at the caps or limits as to how high the interest rates will be going throughout the life of loan. Interim caps shows how high the interest rates can go with each change. Lifetime caps, on the other hand, specifies as to how high the interest rate can go over the lifetime of loan. Don’t sign up for ARM’s which offer no caps.
- Other types of mortgages include reverse mortgage, balloon mortgage, chattel mortgage, sub-prime mortgage and second mortgage. We will define these types of mortgage and describe them in more details in our blog
How to Qualify for Mortgage
How do you qualify for mortgage loans? To qualify, most mortgagees require you to have a certain ratio of debt to income. Off course it can vary depending on the type of loan and down payment. But the general ratio is 28/36. This means that the amount of your income that goes towards housing should be no more than 28%, and the amount of your monthly income that goes towards the total monthly debt, which includes the mortgage payment, should not exceed 36%.
To see if you qualify for mortgage, the lender will also go through your credit and employment history. This is a good predictor of how good you will be in paying back loans in time. Your lenders want to see of you have ever made any late payments (especially in the last two years).
Steady employment with a steady employer is a plus. If your income is unstable, it doesn’t mean that you won’t qualify for loan. It just means that you will have to pay a higher interest rate.
There are several things that you are going to be needing to apply for mortgage. Some of these are W-2 forms of all applicants, money for the closing amount, SSN of all applicants, recent pay statement, checking account deposits, stocks, bonds etc.
Should I Go For It?
Getting a mortgage is a huge decision that requires ample decision making. If you are not financially stable yet, renting is your best option. You do not want the mortgage loan to overpower you. You always want to be in control. If you decide to go for mortgage make sure to identify the real estate first as well as define mortgage type.