A mortgage or mortgage is an agreement that allows people to borrow money to buy property, which the lender can repossess if the borrower defaults.
With property prices getting more and more expensive, most Indonesian families cannot afford to buy a house entirely in cash. Banks and other financial institutions issue mortgages, a type of secured loan, to help borrowers buy property.
Borrowers usually have to provide a down payment of a percentage of the loan amount and must repay the loan through regular payments over a certain period of time. Mortgages come at rates that can be fixed or adjusted (variable). If the borrower defaults on the loan, the lender can repossess the house.
Imagine, Anton and Yani have found their dream home. It came at a price of IDR 750 Million, which they couldn’t afford. Anton and Yani applied for a mortgage at a local bank. After spouse’s assets, occupation, credit history, and other factors, the bank offers them a home loan.
The couple agreed to donate a down payment of IDR 150 million, which is 20% of the purchase price of the house. The bank issued a loan of Rp600 million to cover the remaining 80%. The couple will repay the loan with interest every month for 20 years.
Owning a mortgage is like renting your own house…
Even if you own a house, you get it with borrowed money. If you stop paying, the bank can take over the house. So over a certain number of years, you’re basically paying rent to the bank. When you pay back the loan (with interest), you actually own the house.
How do mortgages work?
What is the difference between a home loan and a mortgage?
Types of mortgages
What are the advantages and disadvantages of owning a mortgage?
Can a lender sell my mortgage?
How to work Mortgage can be a confusing process. Here are the steps:
Review Credit Score
Your credit score is an important factor in determining whether you can get a mortgage and an acceptable interest rate. The higher your credit score, the lower the interest rate you will earn.
If the score is on the lower side, you may want to spend some time improving it before trying to get a mortgage.
See Financial Ability
Often lenders are willing to offer a loan for a home that is more expensive than you can actually afford. It’s your job to make sure you can make the monthly payments that come with the mortgage. When you’re figuring out what fits into your budget, you may want to consider the cost of home insurance, property taxes, utilities, maintenance, and other expenses that come with owning a home.
Saving for a Down Payment
You almost always have to have a down payment when buying a house. Most people to save a down payment of 20% of the price of the house. That’s because many lenders need borrowers who pay less to take out private mortgage insurance.
The borrower is the person who pays for private mortgage insurance, but is there to protect the lender if you default on the loan. Some lenders, however, don’t currently require it even with lower down payments.
Get Early Approval
When buying a home, you usually want to get pre-approved for a mortgage through a lender. Sellers usually prefer to accept an offer from someone with pre-approval, because it shows the bank has promised to lend you money.
When you get pre-approval, the lender will tell you how much they’re willing to lend for the house and the interest rate they’d like to extend. Most banks offer pre-approvals that are valid for a certain number of days.
Before getting Previously, you might want to get quotes from several different lenders. You can do this by pre-qualifying, which is when a lender gives you a tentative offer using limited information. Once you choose a lender and get pre-approved, they will ask for all your documents and financial information to lock in the fees.
Once you have pre-approved and made an offer on your home, there are several other steps to take, including home inspections and appraisals. When you close the transaction, you will sign a letter of agreement that outlines all the details of the loan, including the interest rate, loan amount, loan term, and repayment schedule. You’ll also sign mortgage documents, which give the lender the right to take the house if you stop paying it back.
Once the deal is closed, your job is to make timely mortgage payments for your loan in good standing.
What is the Difference between Home Loan and Mortgage?
Many people use the terms “home loan” and “mortgage” interchangeably, but there are slight differences. A home loan refers to the actual money you borrow from a lender, while a mortgage refers to a contractual agreement you make with a lender. A mortgage allows a lender to foreclose on a home if you fail to pay it.
Types of Mortgages
Not all mortgages are created equal. Here are some of the different types:
Fixed interest mortgage vs. adjustable interest rate
A fixed rate mortgage is a mortgage in which the interest rate does not change over the entire term of the loan. This type of mortgage provides consistency – you know exactly your monthly payments and rest assured that you won’t be impacted by higher interest rates later. The advantage is that you often start with a higher interest rate than an adjusted interest rate mortgage Mortgage – ARM).
ARM comes with a variable interest rate. It often starts with a low introductory rate, but that can change over time based on fluctuations in market interest rates. Your mortgage agreement will usually determine how much the rate of increase is first adjusted, each time thereafter, and throughout the life of the loan (the cap is often 5 percent).
Finally, hybrid mortgages combine the features of fixed-rate and adjustable-rate mortgages. They have a fixed interest rate for a certain period of time (often three, five, or 10 years), then switch to an adjustable rate for the remainder of the loan term.
15 year mortgage vs. 30 years
When you take out a mortgage, you will have a choice of various payment terms. The two most common types are 15-year and 30-year mortgages. A 15-year mortgage has a much higher monthly payment, because you pay off the loan twice as fast. it also often has a lower interest rate, and it does not have many years to grow.
Many people choose 30-year mortgages, because they give you more years to pay off the loan, which results in lower monthly payments. However, you usually have a higher interest rate, and you will end up paying more interest in total compared to a 15-year mortgage.
What Are the Advantages and Disadvantages of Owning a Mortgage?
While mortgages can offer great opportunities for borrowers, they have disadvantages as well.
Advantages of Owning a Mortgage
Mortgages make home ownership a reality for people who can’t afford hundreds of thousands of dollars in cash upfront for a home. Because you spread those costs over the decades, buying a home becomes a lot more affordable.
There’s also the fact that, when you rent a house, you give money to someone else. When you move at the end of the lease, you don’t get it back. When you have a mortgage, those monthly payments go toward your equity in the home, meaning that’s money you could potentially get back when you sell it.
Mortgages also come with potential tax benefits. You may be able to deduct all or part of your mortgage or personal mortgage insurance interest payments on your annual tax return. This deduction can lower your taxable income, as well as your tax bill.
Disadvantages of Owning a Mortgage
First of all, mortgages are expensive. Even though they tend to have lower interest rates than most other types of debt, and interest rates are at historical lows, you are still paying a large amount of interest over the life of the mortgage.
Adjustable rate mortgages come with their own disadvantages. If interest rates go up, your monthly payments could be much higher and potentially unaffordable. Some ARMs have a penalty prepayments, so you can’t avoid rising interest rates by selling or paying off your mortgage early without paying anything in return.
It’s also a fact that you can lose money in your home. Real estate tends to have or increase in value over a longer period of time, but that doesn’t make it impossible for your home to lose value when you own it. The housing market fluctuates – you can buy a house at the peak of the market price and have to sell it when the market price is down.
Another downside that comes with a mortgage is that you have made a commitment to the lender to make monthly payments for decades. If there ever was a time where you couldn’t, it could result in foreclosure. This lowers your credit score and can make it more difficult for you to get a loan in the future.
Can a Lender Sell My Mortgage?
Banks and lending institutions often sell mortgages for their money back and free up cash flow. The group of investors who bought the mortgage notes, sometimes at a discount, took the principal and interest payments from the borrower.
Most of the buyers of these notes are not individual investors – they are hedge funds and other banks. Part of the reason is that banks usually sell mortgages in bulk. However, investors may be able to purchase single mortgage notes through a broker.
The two types of mortgages that investors can purchase are:
Performing Note – a letter stating where the borrower is in the most recent payment. This type of investment may be a little safer, because you know the borrower already knows their payments. However, you will not be able to get this letter at a great discount. Non-performing Note – a letter stating where the borrower missed payments. This distressed letter is a risky investment because the returns don’t come consistently. However, they usually get a discount much higher than the Performing Note.
When an entity purchases a mortgage, it takes over all the rights of the bank or financial institution that is the source of the loan. That includes the right to confiscate property. So if you buy a non-performing note, you can try to help the borrower get back on track. But you can also take over the loan and take control of the property.
Investing in mortgage papers is a very different game than investing in the stock market. As with any investment opportunity, there are risks involved. You may want to do some research first to find out what to expect.
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