What is a Mortgage?

August 30, 2008

This is a very important question and a question that you need to answer entirely before you proceed with searching for a mortgage. Quite simply put, the mortgage is an agreement that happens between you and a bank, credit union or other financial institution in which the bank agrees to pay the overwhelming amount of the money a property costs for you. The property then must become collateral on that amount of money and you are required to pay the money back over time, with the bank seizing the property if you fall too far behind on your loans.

Split Amounts

Regardless of the mortgage that you take out, you are going to be required to put some of the money of the property down yourself. Most people are going to be required to put down at least 5% of the value of the property as a down payment, with the bank providing the other 95% to the property owner. However, if your credit rating is especially bad, then you might have to put down a larger amount in the region of 7.5% to 15% depending on how much you can get the bank to lend you. People with better credit ratings are sometimes able to get away with a 2.5% down payment, but for the vast majority of people the 5% to 95% split amounts are what the norm would be.

Mortgage Type

In addition to the split amounts, another thing that makes mortgages different from each other is the type of mortgage that you are going for. There are two primary types of mortgages and they are known as variable rate mortgages and fixed rate mortgages. In a fixed rate mortgage, the interest rate that you start the mortgage with is the interest rate that you end the mortgage with. In a variable rate mortgage, the interest rate will fluctuate up and down depending on what the volatility within the marketplace happens to be at the time. There are a number of mortgage plans that combine fixed and variable interest rates in differing degrees, but the vast majority of mortgages at the current point in time are either wholly fixed rate or wholly variable rate in nature.

Term Length

The term length of the mortgage is also something that you need to think about and the term length is important specifically because of the fact that it determines the amount that you are likely to pay monthly. Most mortgage by default are a 25-year length, although people with a higher credit rating can volunteer to pay a higher amount per month in order to get that mortgage down to 20 years or in some extraordinary cases even 15 years. People with a lower credit rating are usually going to be able to get a 25-year deal, but 30-year mortgages do exist and are sometimes used for people that have lower monthly cash flows. The term length, interest rate types and split amounts are three exceptionally important parts of a mortgage and while there are others, if you understand these three you are definitely off on the right track when it comes to understanding how mortgages work.

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