What is a Mortgage?

A mortgage is not exactly what people think it is. Many of us believe that a mortgage is a loan that is given to us; instead it is collateral that we give to the lender for a home loan. Before the loan is completely paid off, the ownership rests with the lender which means if you default on the mortgage payments, the lender has a right by law to take the house and sell it.

How a Mortgage Works
A mortgage involves two parties. One is a mortgagor which is you and the other is the mortgagee which is the lender. Both of you sign a mortgage document which creates a claim on your property. This security lien is placed in the public records. You cannot further sale the house to anyone until the loan has been paid in full. If you default, the house can be sold by the lender and the process is known as foreclosure.

Mortgage Lenders
Mortgage lenders are of many types. Banks, mortgage companies, cooperating housing society, finance institutions, credit unions, Life Insurance Companies all can provide you with mortgage.

Types of mortgage
Fixed rate mortgage, variable rate mortgage and balloon rate mortgages are the most common types. Basically, all the mortgages have the same requirement of collateral but the terms and conditions, interest rates and repayment varies for each of them. These types are designed to suit different people with diverse financial statuses.

Fixed Mortgages
Fixed interest rate mortgages have a fixed monthly payment for the entire loan term. Since the interest rate is fixed and the lender cannot benefit from a potential increase in interest rate in future he demands a higher interest. However, you are better off with it as an increase in interest rate will not affect your payments and you can plan in advance.

Variable mortgage
In a variable mortgage the interest rate can increase or decrease according to the change in the base rate associated with prime banks. A borrower can benefit from these if the interest rate falls. The variable mortgage has some more types. These are principal and interest, discounted rate, standard variable rate, home equity and split mortgage.

Balloon mortgage
The balloon mortgage is a fixed mortgage with fixed interest except that after a fixed time such as 3 years the loan amount left has to be paid in full. Mostly people cannot arrange lump sum money at once and they get a 2nd mortgage. This mortgage is for those people who have run out of options in applying for any other mortgage plan.

Mortgage Payment
The payment on a mortgage works in the following manner. The first several payments go more towards the interest rate than the principal loan and gradually the payment towards interest start decreasing. At the end stages of the loan there might not be any interest rate in your monthly payment and you are just paying off the principle balance.

The payment of mortgage consists of principal amount, interest rates, taxes, insurances and other financial charges.

Carefully Read your Contract
When you sign the mortgage contract you should read the terms and conditions very carefully. It is wise to consult a lawyer or experienced person about you mortgage contract for checking it and a for a good advice.