What is a mortgage?
A mortgage loan otherwise known as mortgage is the conditional conveyance of real property as security for the repayment of a loan. It is some sort of collateral security in terms of real estate put up by the borrower (aka mortgager) to the lender (aka mortgagee) in exchange of funds for any purpose. In most all cases the lender is usually a financial institution such as a bank, credit union, etc. Mortgages are diverse and vary from place to place depending on the laws and policies in force within the jurisdiction.
Advantages of mortgage
Obtaining a mortgage is a complex process and usually depends amongst others on the size of the loan, interest rates, mode of payment, credibility of the borrower, taxes and the value of the real property to be mortgaged. Benefits of mortgages are sundry and can be attributed to two actors (mortgager and mortgagee).
- Benefit to mortgagers
Interest rates attributed to mortgages tend to be inferior to any other form of borrowing because the loan is secured against ones property.Interest rates fluctuations could lead to a very promising and beneficial to potential mortgagers. E.g. in the USA, the Federal Reserve dropped the interest rates on the 30 year fixed rate mortgage (FRM) from approximately 6.5 % to 3.4 %. This will encourage and permit many people to take out mortgages or refinancing existing mortgages so as to acquire their wish.The benefits of mortgages to the borrower could be addressed from various aspects such as:
- First mortgage for financing new ventures;
- Refinancing existing mortgages; and
- Reverse mortgages.
First mortgage for financing new ventures
Mortgages irrespective of the type or option linked to it, is a proficient way of financing new ventures. Mortgages could sustain an individual or a family as well as a profession or business. It is extremely difficult to make huge purchases at once, so the option of mortgage makes it easy to acquire a loan / property immediately while paying in the long term.
- A mortgage makes owning a house / home affordable because you can spread the amortisationon your loan over a long period of time usually from a couple to many years. The amount required during the amortisation process is relatively more manageable. Mortgage allows one therefore to purchase a home without having to pay the full price in cash. This does not affect your flow of income thus making it available for other projects or acquisitions.
- Mortgages have relatively low monthly payment. This permits the borrower to build up savingsfor other goals like college tuition which is tax-deferred, purchase of a new vehicle/boat, start home repairs etc.
- Mortgage works in the benefit of the mortgager when assets depreciate. If an asset mortgaged depreciates and loses value, this does not affect the mortgage amount. Hence eventually the mortgager could wind up with a balance superior to the asset value.
- The respect of mortgage repayment schedules improves the mortgager’s credit score hence making it easier for creditors to extend credit and also helps in the determination of the interest rate obtainable on other credit products such as credit cards etc.
- Mortgagers also have access to income tax deductions which reduces tax liability. Moreover the interest on a mortgage may be tax deductible.
- In certain cases one may qualify for a private mortgage insurance and homeowners insurance, which provide tax deductions.
Refinancing existing mortgages
- Payment of mortgages in time builds the home equity value.
- An increase in the home equity value makes the mortgager to be able to apply for a home equity loan. This is usually likened to the acquisition of a second mortgage loan.
- These home equity loan ensuing from the diligent payment of mortgages can be collected in the form of a lump-sum payment. This provides the mortgager funds that can be used for in home maintenance and paying of medical bills, or for home improvements, college tuition, starting a business etc.
- One could refinance an existing mortgage into one with lower interest rates provided the home equity is important and usually considered by many at > 20 %.
Reverse mortgage (typically for old borrowers or those on retirement)
- The home title remains in the name of the mortgager until they die, relocate, sell their home or reach the end of their loan term.
- There are no monthly payments due to the length of the loan
- Income derived from this mortgage is not taxable.
- Payment can be received in different forms.
- Borrowers heirs are not liable to Lenders for amortisation of the mortgage
- Flexibility in interest rate (fixed or adjustable) forms.
- Owners age is directly proportional to the home equity, hence the amount that can be borrowed also augments
- The mortgaged amount can be used for whatever purpose e.g. home repairs, maintenance, paying debts, medical needs, education of progeny, investing in a business etc.
2. Benefit to mortgagees (lenders)
- The main way that the lender derives profit from mortgages is via the interest it generates. These interests equally determine the amount of money to be paid to the borrower for the estate that has been used as a surety.
- Mortgage is a somewhat secure means financial institutions (lender) has in case something goes sideways and the borrower cannot repay the loan taken it, there is still the property, which the lender could sell to pay back some if not all the mortgage.
- In the advent where the mortgager cannot repay the loan and stops payment, the lender claims ownership of the property that was placed as collateral. The borrower equally stands to loss to the lender the money already paid up till that point.
- In the case of reverse mortgage the mortgager is accountable for paying property taxes, insurance, maintenance of the home, if not the mortgage is due
- The lender in reverse mortgage profits from the higher interest rates and the possibility of the fees adding up with time.