Property and down payment

The mortgage loan is usually secured on the particular property. The lender typically requires the buyer to put a down payment, which is usually 20%. This part is considered to be the equity of the borrower and the remaining 80% is considered as a loan. Hence, a mortgage loan is a secured loan and in the event of default, the lender will repossess or foreclose the property and sell it to recover its money.

Lender

The lender can a bank, building society or a credit union, a large financial institution or specialized mortgage company. The lender has first right over other creditors, which means in the event of default whereby the borrower becomes bankrupt, the mortgage lender will be repaid in full first.

Rates and terms

Mortgage loan, like any other loan, has an interest rate and a term. For a residential mortgage, the term is usually 30 years, which means 360 monthly payments are required to be paid. It can also be a 15 year or a 7 year term. The monthly payment is based on the size of the loan, the interest rate, the term of the mortgage loan and the method of payment of loan.

Example

For example, Joe wants to purchase a property in New York for $250,000. He decides to fund the purchase through a loan, which is a mortgage loan. The bank, after qualifying and approving him, asks him to put down payment of $50,000. The loan in this case would be $200,000 for 30 years at 4% per annum interest rate.

Monthly payments

His monthly mortgage payment would be $954. This monthly payment not only includes the interest element but also the capital element. Also, this mortgage loan is an amortizing loan as Joe will be paying off his loan through monthly payments and increasing his equity in the property.

Payoff

After 360 monthly payments, the loan would be completely paid off. In this example, it was a fixes rate mortgage, where the interest rate

did not change.