What is a mortgage? -A mortgage is a loan from a bank or a financial institution against a security like your home itself or any other immovable property. This way ,lender (bank or financial institution) tries to de-risk its lending . In case , the borrower defaults on the loan, the lender can sell the home and recoup its losses. Mortgage payments are usually monthly and consist of four components: principal, interest, taxes and insurance.
Mortgages are basically secured loans, which means that loans are backed up by a capital asset — say the house or land or any other immovable property —owned by the borrower. In case of defaults, lenders are permitted to take back the asset. This action of recovery by taking over the property is known as foreclosure. To save themselves from risk of loss, many times lenders require borrowers to take out some kind of insurance, mortgage insurance, which protects the lender in case the borrower defaults or even such homeowners’ insurance, which covers material damage to the property.
How do mortgage terms work?
The Mortgage Term means the period of time until your mortgage becomes due and payable. Although you can shop for mortgage terms in five-year increments ranging from 15 to 40 years, 15- and 30-year terms are the most common for fixed mortgages. Adjustable-rate mortgages almost always come with a 15- or 30-year term.
Is there a difference between mortgage and amortization?
Yes there is a subtle difference. The mortgage term means the period for which your interest rate is based on whereas the mortgage amortization refers to the length of time that you’ll have to repay the loan amount in full.
Types of Mortgage
There are various types of mortgages. But most common types are as under
- Conventional mortgages
- Government-insured mortgages
- Jumbo mortgages
- Fixed-rate mortgages
- Adjustable-rate mortgages
Terms Related to Mortgage
Arrangement Fees–General administrative/booking fees charged by the mortgage lender to actually set up and secure your loan.
Capital-This is the amount of money you are actually borrowing. This is as opposed to interest.
Deposit-This is the amount you have to pay up front in order to be able to take out a mortgage. Generally, it amounts to around 25% of the total value of the property, with the mortgage itself making up the remaining portion.
Equity-Equity is the share or portion of the property that you actually own, as opposed to the share that you borrow as part of your mortgage. This can go up either as your property increases in value or as you pay off more and more of your mortgage.
Fixed Rate Mortgage-A fixed rate mortgage is one with an interest rate that stays the same for a set term of either two, three, four, five or ten years. With loans like this, you can budget well into the future and you’ll be safe from rising interest rates. However should rates fall, you’ll end up paying over the odds so they are always something of a gamble.
Flexible Mortgage-With a flexible mortgage, you’ll be able to underpay, overpay and in some cases not pay at all each month without incurring any extra charges.
Interest-This is essentially the cost of the mortgage – it is the amount that is added to what you borrow (i.e. the capital) each month until the entire loan is paid off.
Interest-Only Mortgage-An interest-only mortgage is one where the monthly repayments consist solely of the interest charged and do not contribute to reducing the capital borrowed, which is paid off in full at the end of the term. These are different to repayment mortgages. The lender must agree to the repayment vehicle whilst the mortgage is being arranged.
Loan-to-Value (LTV)-The loan-to-value ratio of a loan is the difference between the amount borrowed and the total value of the property, where the remainder is paid up front as a deposit.
Mortgage Term-This is the length the mortgage agreement; the amount of time you have to pay the loan off.
Early Repayment Charges-These are the charges you must pay when you pay off your mortgage. Most lenders will charge repayment charges if you pay off your mortgage before the end of a fixed rate term is up.
Repayment Mortgage-A repayment mortgage is one where the monthly repayments consist of a combination of a portion of the capital owed and the interest charged. These are different to interest-only mortgages.
Residential Mortgage-A residential mortgage is one taken out on a residential property. This is the basic kind of mortgage and is different to a buy to let mortgage.
Standard Variable Rate-The standard variable rate (SVR) is the basic representative rate at which a lender will charge interest on variable rate mortgages. Each lender’s SVR will be different and will fluctuate according to a variety of criteria.
Tracker Mortgage-A tracker mortgage is one where the interest rate directly tracks the Bank of England base rate, staying consistently at a set percentage above it – usually between 0.5% and 2%.
Valuation Fee-This is the fee charged by the lender for the valuation of the property to be used as security for the mortgage.
Variable Rate Mortgage-A variable rate mortgage is one where the interest rate changes according to the particular lender’s standard variable rate.
Fixed-rate mortgage calculators
- Mortgage calculator
- Mortgage calculator with taxes
- Mortgage payoff calculator
- Mortgage annual percentage rate calculator
- Amortization schedule calculator
- Maximum mortgage calculator
- Biweekly mortgage payment calculator
- Home affordability calculator by loan
- How much should you put down?
- How much money can I borrow for a mortgage?
- Income required for mortgage calculator
Is mortgage tax deductible ?
Tax Cuts & Jobs Act brought in a major change in the Internal Revenue Code that completely changed the rationale of claiming mortgage tax deduction . Now ,mortgage interest can be deducted only if you itemize their taxes and do not claim standard deduction. Secondly , the mortgage interest deduction is limited to $750,000 for any new mortgages. Before, homeowners could write off mortgage interest up to $1 million. Then , you cannot deduct the interest on home equity loans i.e second mortgages and you cannot write off mortgage interest on your second home anymore