How Mortgages Work : When you are in debt and have to offer your property to your creditor as security for the fact that you will pay off the loan in due time, the transaction is legally termed as mortgage. Most people consider a mortgage to be the biggest loan that they will ever take in their lifetime. While applying for a regular loan, there is no obvious question of guarantee. If the lender is not pleased with your income, credit history and savings, he can refuse you a loan on the grounds of not feeling secure. However in the case of a mortgage, creditors think differently. It is not just the fact that they will get their money back if and when you pay them back, in case you fail, they will get possession of your property. So while you might not seem like a secure candidate, you can still find ways to get a loan if you put your property on mortgage.
Usually, most people go to banks for a conventional mortgage. This could be the regular bank where you carry out your daily transactions or you could go to a different bank if they are offering better terms and interest rates. There are mortgage brokers who can help you out with this stuff in case you are too busy to figure out what loan is most beneficial for you. Apart from banks, you could approach government agencies, credit unions and pension funds for mortgages as well. Like every other loan, a mortgage too comes along with a term and an adjustable or fixed rate. However there are a lot of additional fees and costs that are usually associated with mortgages, something that you can avoid in case of a regular loan.
A mortgage also has the obligation of a down payment whereby you pay a big amount of money as security, which in turn reduces the amount of money you need to borrow. Usually, one is required to pay 20 percent of the loan but you are free to pay even more. PITI is an acronym that explains clearly how mortgage payments are paid monthly. P is for Principal and refers to the total money your creditor is giving you, I is for Interest and refers to the money you have to pay for the convenience of the loan, T is for Taxes and refers to the money that a third party holds on to till the loan is due and I is for Insurance and refers to the assurance you provide to your creditor in case any disaster like fire, theft, storms or floods occur.
Before we wrap up, it is important that you know the difference between a fixed rate mortgage and an adjustable rate mortgage. While a fixed rate mortgage seeks an interest that remains unchanged as long as the loan lasts, the interest you have to pay for an adjustable rate mortgage varies from time to time. Both come with their advantages and short comings so pick wisely.
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