Nowadays, many people wish to secure loans from financial institutions (bank) in order to invest in one start-ups or another or buy a large real estate by paying the total financial value bit by bit over a long period of time until the total value is completed. To secure a loan therefore, the financial institution (bank) shall require the borrower to ensure the bank (lender) that he/she (the borrower) can pay back the acquired loan. Here is where mortgage comes to play. Mortgage is 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 such system, the borrower pledges to pay the total value instalment ally over a period of many years with a predetermine interest rate until he finally owns the property or pay the loan in full. A mortgage borrower can be an individual or an establishment like a bank or the government while the lender is usually a financial establishment like a bank, credit union or building society.
What happens if the borrower stops paying or accidentally he can’t continue to fulfil his pledge to the bank? In such a situation, the bank looks into the mortgaged collateral. If it was a residential house that was used as collateral (mortgage), the banks maybe force to eject all tenants in the house and sale off the building to recover the loan. In any situation, the bank always ensures that it can recover its loan in case the borrower default from paying the mortgage loan.
Many companies or banks required down payment to the mortgage which is usually a certain percentage of the actual financial value of the real estate or property. Therefore only a portion of the value shall be pay in instalments. This helps the lender to secure complete payment or in case of the borrower default payments, the bank may not suffer heavy losses. A mortgage loan that purchaser has made a down payment of 30% has a loan to value ratio of 70%.
Mortgage loan can be obtained directly by the individual or indirectly through an intermediary. Many institutions like banks or credit unions require a third party (suttee which can be an account holder in the same bank or an insurance company) before a mortgage loan is acquired. This suttee is to ensure that, in the eventuality that the borrower default payment and the collateral is not worth the loan, the lender can deduct from the suttee account and complete the loan.
Mortgage loan have many advantages such as;
Encouraging investment – many individuals today have become car, house, business and real estate owners through mortgage loans they secured. It has enabled them to pay the total value of these properties in small proportions which they could never have been able to pay otherwise. The cost of some of these properties or real estate is usually very high that makes it very difficult to pay at a go but with a loan on mortgage, one can conveniently pay the total cost over a long period of time.
Encourage hard work – acquiring a loan on mortgage, one have to work hard to be able to fulfil the requirements or conditions of payment. The borrower fear losing his property used as collateral to obtain the mortgage loan.
Encourages savings – many people today registered an account with banks in order to be able to secure loans from them thereby encouraging them to save money. Many banks as a policy only give out loans to its customers with good saving records or to individuals with certain amount of money in their account. This has dragged many to engage in reasonable savings.
It has encouraged fraud – many individuals have at times fraudulently acquired loans using collaterals they do not have full ownership or whose value is not worth the loan. This makes them to default payment of the mortgage loan, thereby the lender incurring a lost.
Many borrowers in the eventuality of default paying the mortgage loan may have other creditors. In such a situation, the lender’s right over the collateral (secured property) supersedes the other creditors that is to say; if the borrower becomes bankrupt the mortgage lender shall be paid first in full before the other creditors from the money obtained from the sale of the secured property.
Many individuals, because of unforeseen circumstances default the payment of the mortgaged loan leading to them losing their properties (collateral) like house and are now homeless. A typical example is a man who uses his house as mortgage to receive loan to purchase a real estate relaying on his salary to pay monthly the mortgage rate but eventually lose his job due to economic meltdown. He could not fulfil the payment requirement and his house was later seized by the bank and he made homeless.
Some financial institution has gone bankrupted today due to mortgage loans given out to individuals on collaterals that were accidentally damage by catastrophe. The lender could no longer recover the loan. This is the more reason most lenders seek down payment to every mortgaged loan.
Types of Mortgage
Fixed-rate mortgage – Here, the borrower pays the mortgage at a fixed principal and interest rate for the life span (which may be between 15 to 30 years) of the loan. It should be noted that, this type of mortgage is not subjected to fluctuations in market rates.
Adjustable-rate mortgage – here, the interest rate fluctuates with market rates. The interest rate is fixed at the beginning (often below market rates making the mortgage appears affordable than it really is) then fluctuates with market rates. The interest rates may at one time become very low, this gives the borrower a better chance of paying the mortgage but when it becomes too high, the borrower may not be able to pay back. Markets interest rates cannot be predetermined accurately therefore type of mortgage may land the borrower in very inconvenient situation.