It’s no news nowadays to find people cueing lines in banks seeking for loans for one or two business start-up. While it’s also true that many banks don’t give out loans, the few that award this loans do so as a mortgage loan.
A mortgage is simply a collateral of specific financial value (can be a real estate property, car or salary the borrower has ownership) that the borrower pledges to the bank in order to secure a loan or purchase a large real estate without paying the total amount upfront. With mortgage loan, the borrower pledges to pay the total value in fractions over a long period of time (usually 30 years) with a predetermine interest rate until he finally owns the property or pay the loan in full.
The problem arises when the borrower, due to unforeseen situations can’t fulfil his pledge to the bank. In such instance, the bank is force to confiscate the mortgaged collateral. It may later sale this collateral to recover its money.
With all the uncertainties, why do people still go for mortgage loans? What are the benefits that make these people decide to let go of all odds and are cueing lines?
Advantages of Mortgage Loan
1. Mortgage makes Real Estates Purchase Affordable
The cost of building or buying a real estate property (a house) is usually very high. This will surely be your most expensive purchase ever. And for many people, putting that huge sun together to be able to pay at a go is almost never possible. This is where mortgage come in to ease the pain.
Mortgage loan enables you to borrow that huge sun from a financial institution with just a small down payment. Repayment is spread over a long period that usually makes it easy to pay with your salary.
Again, if you used the mortgage loan to purchase a rental property, this gives you a bigger advantage. Buying a renter real estate properties using a mortgage loan, your tenants are actually the ones paying the mortgage loan. This gives you a possibility to own a real estate property without spending from your endings. In such a case, the value of your net worth increases each month and because of the investment loan pay down, this investment can be view as a means of saving your finance. At the end of the loan payment period, you automatically own a significant property or asset without spending a dim.
2. Cost Effective means of Borrowing
A mortgage loan is issue against collateral thus making the interest pay on the loan to be lower compared to other types of loans. The bank or lending institution is not afraid of the losing its fund since it has a valuable property it can bounce on and regain its funds should the borrower default payment.
3. Long Repayment Period
The mortgage resettlement period is usually long, lasting about 25 to 30 years. Spreading the mortgage sum plus the interest over such a long period of time makes it very easy to pay huge sum without much stress. It allows for flexibility and better management of your resources.
4. Improved Credit Scores and Worthiness
Credit scores is a measure of your debt and payment history of your borrowing activities with your credit card. If you are using your credit card to repay your mortgage load (which you should), there is a high chance that you will be paying more than the minimum payment consistently and timely. Your creditors will automatically increase your credit limits. This is simply due to the fact that they feel more secure that you have the ability to repay what you borrow.
Using your credit card to make regular transactions involving huge sum like repaying your mortgage loan and/or make huge purchase like buying a car, greatly improve your credit rating. Due to this, your credit score will raise securing better borrowing potential from your creditors compared to a person who made limited transactions with his credit card.
5. Access to Cash flow
This is one of the reasons many people go for mortgage loan. Cash flow is the extra sum left after all your bills has been paid. Not all mortgage loans are used to buy homes or real estate. Those that are not used for real estate, gives you access to funds when you need it. This usually provide monthly income, increasing your financial power thus investment capabilities and can be used for home repairs or improvement, car purchase, college tuition for you children and wedding.
Cash flow from mortgage loan is relatively stable and far more predictable than most other business sectors. This is great for entrepreneurs enduring the ups and downs of their start-up life. The cash flow can help sustain you during the bad times and live well during the good times.
Mortgage loan empowers many people to invest. Many entrepreneurs with successful business are as a result of the mortgage loan they received some times back that enables them to kick start their business venture. Many others who are cars, home, property owners are all the benefits from the mortgage loan. This mortgage loans made it possible for them to venture into life time investments that otherwise may not have been possible. And the long term repayment policy makes it possible for them to repay without any change in their social life.
7. Encourage Hard work
Paying a mortgage loan is not an easy task and knowing the risk involves (loss of valuable property used as collateral), one have to work extremely hard to fulfil the conditions of payment.
Also, during the mortgage repayment period, the borrower may be face with varying unpleasant conditions which may include a loss in a value job. These make the borrower to work hard on other funding sources to be able to meet up with the mortgage payment.
8. Mortgage Tax Deduction
There exists the possibility to gain some money from income tax deduction if you have a mortgage loan. The income tax deduction scheme enables those on mortgage loans to benefit from a reduce tax liability. The interest you pay on your mortgage loan may be tax free. This mortgage tax deduction gives mortgage owners big advantage to be able to repay the loan without stress.
9. Encourage Savings
Loans are only awarded to people who own accounts in a bank and at times are calculated as a percentage of your account standings. Many banks as a policy give out loans to its customers with good saving records or to individuals with certain amount of money in their account. These conditions have pushed many who wish to seek mortgage loan or any other type of loan to engage in reasonable savings.
Disadvantages of Mortgage Loans
It will be wrong to talk just about the benefits without letting you know the other side of the coin. Just like any business transactions, mortgage loan comes with some risk and only proper study of these risk will you be able to make an inform choice about a mortgage loan. These disadvantages include;
1. Repay More than You Borrow
The most obvious disadvantage is that you will be required to repay the loan plus the interest. At times, the interest rates may be as high as 15% of the amount borrowed. This is a huge sum you will be losing over the repayment period.
For example, if you borrow $5,000,000 at 5% over a period of 25 years.
You will be required to pay an interest of $250,000 over 25 years period.
Meaning you will pay your lender $5,000,000 plus $250,000 which is 5,250,000
Annually, you will be paying $210,000 or $17,500 each month.
Looking at your monthly payment it sound affordable but actually you are losing $875 every month for 25 years. Looking at the monthly loss or payment amount, it sound affordable but looking at the total loss, it’s huge to just give it off. Therefore, it will be wise to do some rethinking before embarking on a mortgage loan
2. Risk of Losing Value Property
The other major downside to mortgage loan is the potential loss of your value property. Since the mortgage is awarded on your property, you must keep up with your mortgage repayments obligation or you could lose your value property, the one thing to don’t ever want to happen.
During the credit crisis, lenders try hard at maintaining even those struggling with the mortgage in their home. But if mortgage borrowers really can’t make the repayments, the bank may be compelled to seize their home. The building society or bank will then sell this property in order to recover their money.
3. High Fees
In addition to the interest you are required to pay on the mortgage loan, there fees you may also be required to pay which can be hefty. These fees may come in as charges for the loan processing process, forms fees, conveyancing costs (legal work required for mortgage loan) and penalty fees (especially for delay payments). These fees vary greatly but some are as high as $3000.
4. Depreciating Value of Real Estate
Real estate you purchase may depreciate in value over time. There are many factors (which are not all under your control) that may cause this depreciation ranging from natural factors like climate change to human factors such as poor usage. However the depreciation, the mortgage loan does not change thus you may end up with a mortgage loan that is higher than the value of your real estate.
Depreciation by physical damage of the property may require additional funds for repairs. This again may require another mortgage loan which may be difficult to obtain or may cause you to be entangle in a web of debts that may leave you dry or penniless.
Worst scenario can be the advent of a catastrophe in the area that completely destroyed the real property you purchase. This may occur while you are still paying your loan or after complete payment. Not only will you lose the property, you also loss huge fund that you may never recover from in life.
5. Encourage Fraud
Many people fraudulently acquired loans which they have no intension to pay or use collateral they do not have full ownership. Worst till some use collaterals whose value is lower than the mortgage loan. This has landed many banks to hot waters and has cost many people their jobs. By fraudulently acquiring a loan, they default payment of the mortgage loan, causing lender to incur lost.
6. Obligation and Type Risk
More than one type of loans exist and getting a mortgage loan is a complex process and required much more better understanding and knowledge to unravel the ordeal. You may be unsure about your options and what is expected of you during the repayment period. An adjustable rate mortgage has interest rates that change, resulting in higher payments whereas a fixed rate mortgage has same interest rate for the life of the loan and steady payment amount.
With the adjustable rate mortgage, the initial payments may be small and affordable but after the rates are adjusted, the amount you may be required to pay may double making it unaffordable for you. Thus you may risk losing your home (collateral) to your bank.
With all said and done, there are a good number of advantages and disadvantages that comes with the mortgage loan. Therefore, before seeking a mortgage loan you’re your bank, ask all your questions and if in any doubt, don’t go on with your application. Mortgage loan comes with a lot of uncertainties in the future. While you may be certain about your financial standings today, it may be difficult or impossible to predict the same standings in 5 to 10 years’ time. Moreover, these loans last a very long time therefore ensure to educate your wife on such process to avoid long terms disagreements.
That notwithstanding, there are huge benefits (including mortgage tax deduction) to make use of if you make an informed decision and plan rightly to repay your loan. You may have better investment capabilities like a new business venture that may generate some revenue thus making it possible to pay your loan.
Mortgage loans are generally powerful but only if you work hard and make it right!