The Pluses And Minuses Of Mortgages For Ordinary People

The Pluses And Minuses Of Mortgages For Ordinary People
by Mike Johnson


Mortgages are loans that enable ordinary people to own houses. They provide funds to cover most of the purchase cost. There are risks and problems associated with them, but they can be essential tools for satisfying the dream of home ownership.

When most people use the word mortgage, they are usually referring to a mortgage loan. Technically, a mortgage is a note that grants the lender the right to seize, or foreclose, the property being financed if the borrower violates the terms of the loan. This article will conform to popular usage and use the term mortgage to mean mortgage loan.

The mortgage usually provides funding for most of the property cost. They buyer provides money called the down payment to cover the rest. Mortgages generally have a specified term such as 30 years. Usually the loan is paid off by the end.

Amortized mortgages are widely used. The monthly payment covers the interest and a portion of the balance or principle. When the payment amount is determined, it is with the intention that the loan will be paid in full at the end of the term.

Loans that are not amortized can be used. They have a balloon payment, which is a lump sum that should be paid when the term ends. In many cases, such a loan will be accompanied by a savings plan that should build up enough funds to make this payment. Some loans are modified versions of one or the other of these types.

The interest rate may be fixed or variable. Fixed rate loans make life predictable for the borrower because the payment is always the same. However, they create a risk for the lender, in that if interest rates go up during the loan, the cost of funds may exceed the interest being paid. Variable rate loans shift the interest rate risk to the borrower.

Variable rate loans specify how the interest rate is to be determined, and how frequently the rate may change. For example, it may be specified that the rate will change annually, and it will be some fixed percentage higher than the London Interbank Offered Rate (LIBOR). There is usually a cap that sets the maximum rate that may be charged.

The lender has the right to foreclose, i. E., seize the property, if the payments get far enough behind. Some lenders will attempt to work out less drastic resolutions, possibly by changing the terms of the loan. A short sale may be negotiated, where the house is sold for less than the balance due but the lender agrees to accept the amount received. The lender might have the right to attempt recovery from the borrower if a foreclosure sale doesn't yield enough to cover the debt. This is an extremely variable issue that can't be addressed in full here.

Mortgages open the door to home ownership for millions of people. Unfortunately some of these people will be ultimately unable to pay them off. Caution is always appropriate when considering big financial commitments like this.