Mortgage Basics


What is a mortgage?
Where to start when choosing a mortgage?
Mortgage repayment methods?
Flexible mortgage repayments
Other kinds of mortgage repayments
Interest rates
Mortgage insurance


What is a mortgage?
A mortgage is a way of using property as a guarantee for the payment of debts. The word mortgage (which means something like a death vow in French) represents the legal instrument used in securing the property but it's also used as a reference to the debt guaranteed by the mortgage.

Most often the mortgage offers are associated with loans guaranteed from real estate and rarely from other property but there are cases in which only land may be in mortgage. The mortgage is the standard way by which businesses or individuals can acquire real estate without paying its full price right away.

In some countries it is quite usual a home purchase to be funded by a mortgage. Since the demand for real estate mortgages is high in these countries, strong domestic markets have emerged in them. Good examples are Great Britain and the United States.


Where to start when choosing a mortgage?
Okay, once you've decided to get a mortgage you have the following ways to proceed. You can acquire a loan directly from a lender (banks, specialized mortgage lenders, building societies), or you can use services of a mortgage broker. You can act based only on your knowledge and information or you can get recommendation and specialized advice to choose the best one that suits your particular needs. Whatever path you're going to choose you'll be much more comfortable if you have at least a basic knowledge on the topic.


Mortgage repayment methods
There are two main ways to repay your mortgage - repayment and interest-only.
Repayment is the most popular one. With this kind, your make monthly payments that repay both the interest owed and the amount that you've borrowed until the full loan is paid off.

With an interest-only mortgage, you make monthly payments to cover the interest on your loan but not the amount you've originally borrowed. At the end of your mortgage term, you must pay the original amount of the loan. In order to do this you have to put money in another investment. The main idea is that this investment will hopefully make enough money at the end of the term so you can repay the mortgage loan. How you can invest your money is another story (there are different ways to do it) but you should keep in mind that these are in general risky investments so usually there are no any guarantees that you'll make enough money to repay your debt.


Flexible mortgage repayments
Some kind of mortgages offer you opportunity to vary your monthly payments - you can make smaller or bigger repayments each month, you can make no payments at all for some time or you can pay the whole sum at once. If these options are part of your contract, you usually can do any of them without paying additional fees. This is very convenient if you have variable earnings each month. But if you don't need these options, it's better to look for a mortgage plan that does not include them because most probably it'll be with a lower interest rate.


Other kinds of mortgage repayments
Current account mortgages combine a current savings or other account with a mortgage. This kind is good if you like the flexible possibilities mentioned above. Also since the interest is calculated on a daily basis, every day that your money (salary or whatever) spend in your account decreases the overall loan size and therefore the overall time to pay it.

Offset mortgages, similar to current account ones allow you to offset the balance of your mortgage against any money you may have in a savings/current account held with the same lender.

All-in-one mortgages are similar to the above ones, but your money are combined in one account instead of several separate accounts.

Have in mind that the above three types are a little bit difficult for understanding at once and also they are not very easily manageable without a good self control.


Interest rates
There are several ways to calculate the interest rate. Here are the most famous ones in brief:
Standard variable - this is the most common rate. It goes up and down depending on some national based interest rate, for example the Bank of England's base rate.
Fixed - this rate is fixed for a given period. During the period the payments stay the same, no matter whether the rates go up or down.
Tracker - in this case, the amount that you pay changes with the base rate. Most usually you pay a set percent (for example 0.7%) above the base rate for a given time period or for the full mortgage term.
Discount - in this case, a reduction on the given interest rate is offered (for example 0.5% off the standard variable rate) for a given time period. If the lender's standard variable rate changes, the discounted rate is also changed.
Capped - this kind of rate is guaranteed that will not rise above a given level for a set period of time. Thus you know that this is the highest interest you'll have to pay even if the rates climb in general.


Mortgage insurance
There are two aspects when talking about insurances concerning a mortgage. First, a lender is most probably to require that you make a life insurance in order to pay off your mortgage in case you die. Second, you may also want to make an insurance to protect your loan payments in case you become ill, disabled or eventually lose your job.


If you've read all of the above, at this point you should already have a basic idea about mortgages. If you still want to expand your knowledge, you may go to our mortgage refinancing section here or to some of the other sections of the site. To do this, simply choose one of them from the left menu at the top.


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