Banks all over the world are offering loans and credits and other forms of financial assistance. People use those products in various moments and for various purposes. However, one type of loans has a distinctive purpose, since it is used for the process of buying a home, or some other kind of property. These loans are widely known as mortgage loans. The term comes from the French law, meaning “death pledge”, but other synonyms are also present, and these loans are today called “home loans” as well.
Mortgage is something which is familiar to American ears. Since today’s homes in United States are largely bought through this principle. This clearly shows the importance of this method and demonstrates how effective and attractive this type of loans can actually be. In fact, the introduction of these loans and the appearance of Federal Housing Administration (FHA) in 1934 largely changed the numbers and statistics of home-ownership in United States. Nowadays more than two-thirds of American citizens live in their own homes.
How It Works?
The basic idea behind a mortgage loan is fairly simple one! Even though a lot of people are scared of those fancy bank terms and financial mambo-jumbo, but in reality the process is very straightforward. The client comes to the bank and asks for a loan which could cover the price of the property he wants to buy. The bank checks his record and financial condition and either allows or doesn’t allow him to have the money. If the answer is yes, he pays a certain amount as a guarantee. This is called the down payment, which usually takes about 20% of the property’s purchase price.
What is left of the total requested amount is known as the principal. And this is the actual amount that the client has to return to the bank. Also, they sign an agreement which puts the property as another form of guarantee called a collateral. Which means that the house can be seized by the bank if the client does not follow the deal. Additionally, the two parties will agree on the length of the loan and the subsequent size of the monthly payments, as well as the size of the interest rates.
Mortgage loans can have fixed and adjustable credit rates. This is something that clients can choose according to their preferences and desires. Fixed rate means that the payments to the bank will be the same every month for the duration of the loan, and when it comes to adjustable rate mortgages (ARMs), the size of the monthly installment can fluctuate and be lower or higher, according to several external factors.
The process of gradually reducing the loan is called amortization. Banks use this to make everything easier for their clients. Mortgage loans are mostly taken for loan periods of 30 years. Also there are other options as well and the period can be higher or lower. Depending on the agreement between the bank and the client.