Buying a house is the personification and the realization of every American dream. But that was not always the case. In fact, before the start of the Great Depression, only four in every ten American families owned a house. That is because there are just a few people who had enough money to buy a house in a lump sum.
Before the 1930s, there’s no such thing as loan mortgages or a bank loan that is specifically designed for people who wants to buy a home, commonly known today as mortgages. In layman’s terms, a mortgage is a form of loan in which your home will serve as collateral, when the lending company or the bank loans you a significant amount of money (more or less 70% of the price of the property you are planning to buy), which you need to pay back over an agreed upon period, with interest.
If you fail to pay the amount you loaned to the bank or the lending company, they will have the right to foreclose or take your home legally. For many years, the only form of mortgage available for people who wants to buy a house was the fixed-interest housing loan that is paid over 30 years. It offers borrowers the stability of regular monthly payments with a low-interest rate.
In the early 80s, the adjustable rate mortgage or ARM was introduced; loans with a much lower interest rate that can be adjusted every year until the loan are fully paid. During the peak of the housing bubble when lending companies or the bank were trying to give unqualified borrowers a loan, they started offering new and creative adjustable rate mortgage with a shorter reset period, lower interest rates and the limits on the rate increase is non-existent. To know more about mortgages or housing loans, you can check out websites related to the subject or visit this link.
When you match a bad mortgage with a not-so-good economy, you will get a housing bubble, rampant housing foreclosures. Since 2007, or the start of the recession, more or less 200,000 Americans entered foreclosure proceedings each month. Now, the foreclosed properties are turning into full-on repossession. These foreclosed properties reached the one million mark or one million homes in 2010.
Looking back at the 2008 housing bubble where the United States experienced a flood of foreclosed houses, it is apparent that a lot of borrowers did not fully understand the terms and conditions of the mortgage they are signing. According to research, at least 35% of adjustable-rate mortgage borrowers do not have an ounce of an idea of how much the interest rate of their loans could rise.
That’s why it is critical to know and understand the terms and conditions of your housing loan, particularly the risks of your “Nontraditional” mortgage. This article will discuss what a mortgage and the kind of mortgage payments is. We will start with the most common question when it comes to this subject: What is a housing loan or mortgage?
In legal terms, a housing loan or mortgage is putting up property as collateral to creditors, lending companies or banks as a form of security for the payment of a debt. In layman’s term, a mortgage is a loan. For most people, it is the most significant loan they will borrow in their lifetime. With a traditional loan, there is no clear collateral.
The lending company or the bank will check your credit score as well as your credit history, your source of income and your savings and determine if you are a good player and not a liability when it comes to paying your debt. With mortgages, the collateral is the house you are planning to buy. If you can’t pay the debt, the principal loan and the interest, the lending company or the bank will have the right to take the house using a legal procedure called foreclosure. To read more on mortgage loans, visit https://en.wikipedia.org/wiki/Mortgage_loan.
The down payment on the housing loan is the lump sum you are required to pay up front. The equity will reduce the amount of money the borrower will have to borrow from lending companies or banks. You can pay as much equity as you want, but there is a minimum amount depending on the lender’s policies. The usual amount is 20% of the property’s market price.
But there are other lending companies or banks the will only requires borrowers to pay equity of at least 3% to 5%. The bigger equity you pay, the lesser loan you will need and the lower monthly payment you will pay. The monthly loan payment is composed of principal, interest, tax and insurance.
Principal – It is the total loaned amount from the lending company or the bank after you paid the equity or the down payment.
Interest – The amount the lender will charge the borrower for the loan. It is a percentage of the total amount borrowed.
Tax – The amount you pay your property tax is sometimes put into escrow accounts, a third-party agency that will hold the accumulated property tax until it is due.
Insurance – A lot of housing loan will require the borrower or the buyer to purchase hazard insurance to protect their property from losses due to fire, theft, storms, floods or other potential calamity or disaster. If you own less than 20% of your home’s equity, the lender will require you to get private mortgage insurance.
With fixed-rate mortgages, your monthly premium will remain almost the same for the rest of your loan’s life. What changes from year to year or month to month is the percentage of the loan premium that pays down the principal amount of the mortgage and the percentage that is pure interest. The regular repayment of the original loan, as well as the accumulated monthly interest, is called amortization.