Understanding What A Mortgage Is

From the previous article, you have understood what a reverse mortgage is. Now, let’s go deeper into understanding what mortgage is, and some of the important things you have to know about mortgage.

Let’s kick off this with a video about mortgage.

mortgageMortgage: A financially legal and binding procedure to facilitate the transactional flow of money between two parties, referred to by the term lender and borrower, in exchange of any immovable/movable entity with a physical significance under the given laws and conditions.

The borrower gets money in exchange of the entity being under the ownership of lender for a mutually agreed stipulated time. The lender has the rights and necessary privilege to claim on borrower’s property in case if the later faults on the line of repayment or does not respect the terms and conditions of the agreement previously agreed upon.

Technical Terms

There are few technical terms associated with mortgage:
Loan Amount
Loan amount is the money which borrower takes from the lender in order to pay for the property given under the care of lender.

Pre-payment

This is an option with the borrower which he can exercise to fast re-pay his pending loan in order to secure his property.

Principal Amount

The total amount loaned by the borrower from the lender.

Interest Amount

This is the amount which is paid as interest on the principal amount by the borrower to the lender over the specified period.

Typically, mortgage is of two:

Fixed Rate
Under this category, there is a mutual agreement between borrower and lender whereby the fixed time period is decided upon and fixed repayment amount on regular interval, usually a monthly phase out activity, to repay the complete amount.

Floating Rate
Under this category, there is no fixed amount being paid over the mutually decided period, which usually ranges from 5 to 30 years entirely dependent on the loan amount. The rate is calculated based on the market fluctuations and economic scenarios.

This is a very crucial phase in everybody’s life when it comes to applying for loan to secure your dream home. Usually, we all opt for reputed banks, if possible government undertaking, to make sure that they are no risks involved and preferably lower interest rate involved. It is very imperative for us to do proper analysis before we opt for the property and then for the bank of our choice.

1. Note down your financial liabilities & daily expenses
a. Once you have made up your mind to go for your dream home, make note of all your financial responsibilities in terms of any existing investment and total amount.
b. Now, monitor for close to 2 to 3 months to see how much you spend on your household activities. The sum of a & b will give you clear perspective about how much bandwidth you have in terms of opting for the loan amount.

2. Analyze your future projection in terms of earnings
a. Based on your current total household income, make a calculation about the future
earnings for next 10-15 years and see how much you could probably save.
b. Keep aside a portion of amount for any eventuality from the projected amount.

3. Tax exemption
a. Considering the existing investments that you have around for the sake of tax saving, calculate the expected principal and interest rates. Once you have followed the above three steps, you will have the clarity around your financial strength to decide about the price range for the house. These steps will also give you clear perspective about how you can save your tax by stop investing in other financial instruments that you had in past.

Love this article? We will be sharing more about mortgages, real estate, and anything that can make you financially wiser with property!

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