Mortgage Loan is a type of loan that is secured by real estate or personal property through the use of a mortgage note. Mortgage loan is an agreement to payback with interest in something during the due date. According to Anglo-American property law, a mortgage occurs when an owner pledges his interest as security or collateral for a loan. Furthermore, there are two types of mortgages loans which are conventional and jumbo. Beside this, a mortgage also known as it was a conveyance for land that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain conditions were not met. The mortgage debt remained in effect whether or not the land could successfully produce enough income to repay the debt. In theory, a mortgage required no further steps to be taken by the creditor, such as acceptance of crops and livestock, for repayment. Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country.
Nobody can say for certain where the history of mortgage loans began, but the history of mortgage loan can be documented at least several thousand years back. No matter how many years old this system is, the basics have never changed. The world ‘mortgage’, the ‘mort’ is from the Latin word with the meaning of death and ‘gage’ is from the sense of that word which means a pledge to forfeit something of value if a debt is not repaid. During the early 1990s mortgages moved from Europe to settle in America as land ownership increased. However, World War II changed the mortgage scene dramatically. It coming home and entering the workforce. A lot of people become avid consumers as the economy boomed so the demand for mortgages occurred. Nowadays, Mortgage has become a part of our lives as it is something we wouldn`t think about as far as their origin. The purpose of providing mortgage loan is to help customers or public to buy their ownership. For example, people mortgage a loan to buy house, car and so on.
According to John Daniel (Nov 2006), different country might have different mortgage market due to tax as different tax rules have a significant implication for customer, fixed-rate mortgage long term period, variable-rate mortgage rates set by lender, ratio of fixed-rate to variable-rate mortgages as FRMs and VRMs can show significantly different prepayment behaviour patters., partial prepayments subprime or low-document loans, and composition of Mortgage-backed securities. Lisa Schreiber (Sept 2009) says, “We focus on managing risk. It`s a very important component of our philosophy. There are many types of mortgages used globally, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements. First and foremost, a mortgage loan typically consists of conventional mortgage loan and jumbo mortgage loan. Conventional mortgage loan is a mortgage in which the interest rate does not changes. Conventional mortgage loan also called as Fixed-Rate Mortgage (FRM). Fixed Rate Mortgages, the interest rate and monthly payment, remains fixed for the term of loan. This category of loan has a comparatively low rate of interest. According to Jrl Fut Mark (Oct, 2008), the value of FRMs depends on interest rates, the house value, and mortgage maturity. Nevertheless, only a few people choose for this type of mortgage loans in Malaysia. This is because conventional mortgage becomes unpredictable after the fixed rate gets over on the mortgage loan with a regular period of time. In general, the longer the term of your mortgage loan, the larger the premium between a fixed and adjustable rate mortgage. Jumbo mortgage is a loan amount exceeding the conforming loan limits. It is a loan that does not conform to maximum limits. Lenders take a large risk in lending Jumbo mortgage. Lenders ask for high down payment for Jumbo mortgage because it will be harder to resell the property if it is on a luxury property defaults. Nowadays, housing prices are increased and it bring the jumbo mortgage trends to a higher stage. The limited availability of it is slowing down the recovery housing market. Buyer who would normally qualify for jumbo mortgage is more likely to treat them as high risk. Adjustable Rate Mortgages, the interest rate is fixed for a period of time, after which it will periodically adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain. Since the risk is transferred, lenders will usually make the initial interest rate of the ARM’s note anywhere from 0.5% to 2% lower than the average 30-year fixed rate. In most scenarios, the savings from an ARM outweigh its risks, making them an attractive option for people who are planning to keep a mortgage for ten years or less.
‘To get a mortgage now, you better walk on water,”? says San Diego mortgage broker Victoria Johnson. (Nov 2000) ‘If you are down on one of those, you don`t want to be down on the other two,”? says McClung. (Aug 2008) These shows that, as a customer we need to choose what mortgage loan that we need and how to choose the mortgage correctly. Below are the steps that we need to do when we are applying for a loan. Before applying for a loan, customer should check the current interest rates, review his or her credit report then begin to shop for a lender. When comparing lenders, customer should consider such factors as lock-in policies, fees and loan options. In general, the interest rates will change time to time or it changes between the time when the customer start the mortgage application and the time when it is approved. Nevertheless, it is wise to compare the rate who offers by different lenders before customer apply for his or her mortgage.
Assumed that a customer loaned a bank $1,000,000 at a 5% interest rate and it is compounded annually, the bank would pay customer $50,000 per year. So why can’t the customer get a $1,000,000 mortgage and pay the bank $55,000 a year, let them earn a 10% profit? This is because the traditional mortgage is designed so customer will end up owning the house when the mortgage is paid off. The example above would apply to an “interest only” mortgage, where customers are renting the house only from the bank. After 30 years, there will be zero equity. It’s the reverse of your loaning $1,000,000 to the bank and earning $50,000 per year in interest. Actually, the bank is renting the principal from customer, the same way customer rent a house from the bank with an interest only mortgage. Now, let’s say customer agreed to loan the bank $1,000,000 for 10 years, with the interest being compounded onto the principal annually. Using simple interest compounded annually, the situation would look like this Year Principal Interest One 1,000,000 50,000 Two 1,050,000 52,500 Three 1,100,250 55125 Four 1,157,625 57881.25 Five 1,215,506.25 60,775.31 Six 1,276,281,56 63,814.08 Seven 1,340,095.65 67,004.78 Eight 1,407100.42 70,355.02 Nine 1,477,455.44 73,872.77 Ten 1,551,328.22 77,566.41 After 10 years, the principal has grown by over 50%, from $1,000,000 to $1,551,328.22. The amount of interest that customer are earning every year has also grown over 50%, even though the interest rate is fixed, at 5% compounded annually. In order to illustrate the effect compound interest has on mortgage payments. With mortgages, we want to find the monthly payment required to totally pay down a borrowed principal over the course a number of payments. The standard mortgage formula is:
M is the monthly payment. i = r/12. This formula can be express in many different ways, but this one has avoids negative exponentials which confuse some calculators. For $1,000,000 mortgage at 5% compounded monthly for 15 years. We would first solve for i as i = 0.05 / 12 = 0.004167 and n as 12 x 15 = 180 monthly payments Next we would solve for (1 + i)n = (1.004167)180= 2.11383 Now our formula reads M = P [ i(2.11383)] / [ 2.11383- 1] which simplifies to M = P [.004167 x 2.11383] / 1.11383 or M = $1,000,000 x 0.00790 = $7,908.15 Now, one important feature of the mortgage formula is that it’s the principal is multiplied last, meaning that we can develop a table of mortgage rate multipliers for any fixed time period that will yield a monthly payment simply by multiplying the principal borrowed. Calculation of how much interest customer had pay the bank over the course of the mortgage, just multiply the amount of the monthly payment by the number of payments and subtract the principal: ($791.81 x 180) – $100,000 = $142,525.80 – $100,000 = $42,525.80 The only bright side to paying the bank all of that interest is that in most cases, it’s deductible on the Federal income tax in the in the years that it’s paid. The savings to customer depends on what tax bracket are customer in. If customer are only in the 10% tax bracket to start with, he or she will only getting a 10% discount on the taxes for carrying a mortgage. If he or she in the 25% tax bracket, he or she are getting a 25% discount.
As a conclusion, normally customer mortgages a loan is to purchase a house, car or equipment. Mortgage loan is subdivided into two primary types which are fixed rate and variable rate. A fixed-rate mortgage is a loan that charges a fixed set of rate throughout the life-long of the loan. It allows purchasers to spread out the cost of an expensive purchase which enables them to make a smaller, predictable payment over a long period of time. A variable-rate mortgage is a loan which rates of interest does not stay the same all the time. The monthly payment will change with the changes of the rate of interest. For example, an increase in the rate of interest will cause the monthly payment to move higher and vice-versa. Apart from these, Variable-rates loan have lower initial interest rates compared to fixed-rates loan which results in a lower monthly mortgage payments. With variable-rates loan, more buyers are able to afford more expensive homes than they would be able to purchase with a fixed-rate mortgage. A monthly mortgage payment will consists of a series of components comprising of principal, interest, taxes and insurances. Besides the money required covering the mortgage loan, obtaining a mortgage requires an amount of related money to cover the down payment and closing costs. The amortization schedule that shows the true cost of purchasing a home, including the amount of interest paid is often neglected. A solidA credit-rating and a mortgageA pre-approval will both be beneficial when you are shopping for a home. A mortgage pre-approval shows whether a buyer is able to make purchases. There are many types of loans and potential lenders out there. It is advisable that we search thoroughly for the best loans that suit our budget and lifestyle.
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