Mortgage Loan – Meaning, Types and Approval Factors

Mortgage loan is a loan secured use to finance by real property. It is usually used with specified payment periods and interest rates according to the agreement of the mortgage loan made between the two parties. Mortgage loan also can know as amortized loan. Under legal agreement, the mortgagor (borrower) gives the mortgagee (lender) a lien on the real estate as collateral for the loan. However, the home loan and mortgage are often used interchangeably. So, the mortgage is really an agreement that makes the home loan work- the commercial bank would not lend you some hundreds of thousands of money unless they knew they could claim your home in the event of your default. Generally, the word mortgage is most commonly used to mean mortgage loan. Besides that, a mortgagor can obtain the financing to buy or secure against the property from a financial institution for instance, a bank, can either directly or indirectly through intermediaries.

Mortgage Loan

On the other hand, there are many types of mortgages which are widely being used in the world. For example, fixed rate mortgage (FRM), adjustable rate mortgage (ARM), equity loan, budget loan, flexible mortgage, balloon loan and others. All of the interest, term, payment amount and frequency, as well as repayment of the mortgage loan may be subject to local regulation and legal requirements. Interest may be fixed by the life of the loan and change at the certain pre-defined periods; the interest rate can also be higher or lowers which is controlled by the mortgage company. Second is term, mortgage loan normally have a maximum term that is the number of the years after which a mortising loan will be repaid. Third is payment amount and frequency, which is the amount and frequency of the payment the mortgagee should pay to the mortgagor. Other than that, some of the amount paid per period may change or the mortgagor (borrower) may have the option to increase or decrease the amount paid. Furthermore, types of the mortgages may restrict prepayment of all or a portion of the loan, or may require payment of a penalty to the mortgagee (lender) for the prepayment.

Among the types of mortgage loans, the most regularly used mortgage loan are fixed rate mortgage (FRM) and adjustable rate mortgage (ARM). The first type is the fixed rate mortgage (FRM) is the interest rate does not change during the whole term of the loan. Second type of the mortgage loan is adjustable rate mortgage (ARM) is the interest rate can be changed depending to the situation of the economy. For instance, when the economy is expansion then the interest rate will increase

Fixed rate mortgage (FRM) also called as a conventional mortgage is a mortgage mean the interest rate and the periodic of payment does not change during the whole term of the loan. For the fixed rate mortgage, payment for principal and interest should not change entire the life of the loan. Fixed rate mortgage than interest rate and the periodic payment does not change but the amount paid by the mortgagor every month that ensure that the loan is paid off in full with the interest at the end of its loan term.

Besides that, the other types of the mortgage loan that can be applied is Adjustable Rate Mortgage (ARM) also known as a floating rate or variable rate mortgage. Adjustable rate mortgage mean a mortgage interest rate that may change, normally response to change in the Treasury bill rate or the prime rate. The interest rate adjustment is primarily to bring the interest rate on the mortgage in line with market rates. The borrower is protected by a maximum interest rate known as a ceiling, which might be reset annually. When the interest rate change, the adjustable rate mortgage monthly payments increase or decrease at intervals determined by the lender. Adjustable rate mortgage loans usually have initial lower market interest rate in the return for the borrower sharing the risk but eventually the interest rate may be increase during the life of the loan.

Other type of amortized loan is balloon loan, which is also known as a balloon note or bullet loan. Balloon loan is a long term loan that has a large balloon payment due to upon maturity. Balloon loan have very low interest rate payment and requiring very little capital outlay during the life of the loan. The main disadvantage of the balloon loan is the mortgagor needs to be self disciplined to preparing the large single payment, when the interim payment is not being made by the mortgagee.

The factors that affect the approval of mortgage loan

In order before for us to get approval of mortgage loan from the banks, there are some aspects that are needed to be considered which an outstanding debt is the most important part to get approval of the mortgage loan from the banks. The bank might decide whether the person will get the mortgage loan or not, if the person who still have thousand dollars of debts on them such as car loan, credit card , home loan and others. So, there is a higher probability the bank may not pass the mortgage loan to this typical applier. There have only one way to solve this type of problem which is that applier must clear off all the outstanding debts before one could be consider qualify to apply mortgage loan.

Second factors are credit cards. Nowadays, money notes are replaced by credit cards, so many people are spending their plastic money which is credit card when purchasing goods or services. Therefore, they always have a thought in their mind that is buy it now and pay it later. As a result, it will affect you apply the mortgage loan. Besides that, before you apply mortgage loan you should not apply too many new credit cards because it will make the banker wonder about your financial situation and hold your application form.

The third factors are credit report. Credit report is like a financial statement which commonly used to record personal or individual past borrowing and paying the outstanding debts. Credit report also is an important factor that affects the approval of the mortgage loan. This is because if the person has a strong credit report then he would be easier to get approved from the mortgage company for his mortgage loan. Besides that, if before you do not obtain a strong credit report, make sure that you must settle your debt off first before you apply the mortgage loan.

Last but not least, Capital also is the factor that will affect the approver of the mortgage loan. Before you apply the mortgage loan, you need to consider the all of the costs included such as the closing costs and the down payments. After that, you must make sure that there is enough capital in your saving account before applying the mortgage loan. If you have insufficient capital and still apply for mortgage loan eventually your application will be rejected by the mortgage company. So, one must make sure that he/she has a fixed capital or fixed income to raise your own capital in yours saving account in order to apply mortgage loan.

How to avoid the mortgage loan?

One best way to avoid or prevent the mortgage loan is to create a budget and do not stretch yourself too far. People always cannot predict what will happen in tomorrow. So you need to build a detail budget of capital and expenses in order to make sure you can face the financial crisis if the economy is having a recession. If you have a sufficient capital when the economy was unexpected downturn, it is better that at least you have already build a detail budget capital to help you face the crisis. The second way is all the borrower need to be careful with the adjustable rate mortgage. Because these type of the loan can let the mortgagor to bear more interest and pay more money. Adjustable rate mortgage is the interest rate might change depend the market situation. Thus, make sure you have enough budget of capital to pay all those loans and payment. Third effective way to avoid the mortgage loan is don’t jump to refinance your home to pay off the credit card debt. Nowadays, many people used their credit cards to refinancing their homes. But this is not the best way to clean all the debt and to save your home. This might be a risk. As when you do so, the money you spent by credit cards are making you need to pay more interest on the credit card companies. If you are unaffordable to pay the home loan payments, then you should sell out your house and may think of renting a house instead of buying it by yourself.

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