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Sunday, November 28, 2010

Important Information about Mortgage Loans


Important Information about Mortgage Loans

Imagine you want to get your family a place they will call home, but lack enough cash in form of savings in the bank to pay for the house in full. In such a situation, it makes total sense to use the small amount of cash that you have as down payment and then apply for a loan against the property as collateral, which you will then start repaying in form of monthly installments until the loan is due… and that is what is known as a mortgage loan.

What exactly is a mortgage loan?
A mortgage loan is one type of loan a home buyer (mortgagee) procures to be able to pay the property seller in full, after which the mortgagee is expected to repay the lender (mortgager) the total mortgage amount plus fees and interest accrued as agreed. Until the whole amount is paid off satisfactorily, the title deed or ownership of the property in question remains with the mortgager.

There are several types of mortgage loans customized to meets the tastes and preferences of different mortgagees. There are fixed rate mortgages, variable rate mortgages, long-term or short term mortgages etc. A mortgagee should procure a specific type of mortgage depending on their financial needs and their long-term plans. For example, a mortgagee who plans to live within the property for a long period of time may opt for a long-term fixed rate type of mortgage compared to the one who seeks short-term deals for investment purposes. Thus, both the mortgager and mortgagee must spend enough time and efforts on finding the most suitable mortgage loan customized to an individual’s mortgage needs.

How does Mortgage Default occur?
In case you fail to honor your end of the mortgage loan deal i.e. make the monthly payments towards the loan as agreed, it will result in the mortgage loan being termed as an ‘in default’. In such a case, the mortgager has the right to foreclose on the property meaning you the mortgagee will lose the property. Mortgage default should be avoided as much as possible because even if the mortgager doesn’t foreclose on the property, chances of tarnishing your credit score are quite high. This will put you in a very compromising situation because you will affect your odds of securing a loan of whatever kind in the future with a bad credit score.

Thus, to avoid a situation that will lead to mortgage default, you should ensure that your payments towards your debts do not exceed 28% of your total revenue or monthly income. You should factor in other loans such as credit card debts, car loan, etc that are pre-existing when applying for the mortgage in order to calculate and manage your finances effectively.



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