Mortgage Loans - Concept Made Easy

This article deals with the concept of a mortgage loan, the process of its application and other related nuances, briefly and as comprehensively as possible.

The term “mortgage loan” is used for describing the money that a lender lends to a borrower, against the latter’s real estate which is collateral or security for the money that is being lent. Therefore, this kind of a loan is a legal mechanism that enables a person to borrow money from various government and private lending institutions.

The mortgage loans are generally long term loans that have to be repaid in small installments every month, over a period of 10, 20 or 30 years, depending on the nature of the loan, the amount to be repaid and the interest rate.

The process employed is generally that of amortization, which involves the slow payment or repayment of a certain sum of money over a specified period of time. It is to be noted that while giving a mortgage loan, the lenders will take into account the risk factor, i.e., the “creditworthiness” of the borrower, risk of change in interest rate and time specific delays.

There are 2 important types of mortgages:

1. Reverse mortgage which allows senior citizens to avail loans in cash against the value or equity of their houses. These mortgages don’t have to be repaid. Therefore, it serves as a tax free income for senior citizens, for as long as they live.
2. Second mortgage loan allows a borrower to loan money against the equity of his house which is already mortgaged. Interest rate is lower than initial rate of lending.

The general process of mortgage application involves getting a “decision in principle” from the lending institution, which is basically a statement of the amount of loan a lender will give, if anything at all. This is based on the borrower’s income, status of employment and the kind of property he wants to buy.

After this the borrower will have to choose a solicitor to look after the legal matters of the deal. Then a complete application has to be made, as per the format provided by the lending institution. Next come reference checks made by lenders with borrower’s employer, banks, landlords etc., followed by property valuation, offer for the mortgage made by the lenders and finally the exchange of contracts, if one is buying a property and the completion of the deal.