Mortgage Financing
Mortgage financing is a necessity in today’s world. If we eliminate mortgage financing from our financial and economic systems an overwhelming majority of people would no longer have access to basic amenities of life such as homes and cars etc. Imagine living in a world where only cash based transactions are allowed. What do you currently posses (owing to mortgage financing) that you would have to forego in such circumstances? This will help you to realize how deeply mortgage financing is embedded in our financial system. If we take mortgage financing out of the equation our financial system will most likely be crippled. The most important use of mortgage financing today is its ability to help people buy both residential and commercial properties without having to pay full value (of the property) in cash. Mortgage financing is thus one of the most important and most frequently used financial instruments around the world. Currently various types of mortgage financing contracts are available to fulfill varying needs of different customer segments. A number of parties are involved in a mortgage financing transaction including the creditor or lender, the borrower, the mortgage broker etc. We will now overview the role of each of these parties in a mortgage financing transaction.
- Creditor/Lender – Creditor/lender refers to an entity that loan out money to the borrower to buy the property in question. Creditor can be both a person and an institution. Previously banks were the only creditors present in the mortgage financing market. However, the ever-increasing popularity of mortgage financing has given rise to an increasing number of mortgage financing companies. This recent wave of mortgage financing companies has increased the number of available options for customers to choose from.
- Debtor/Borrower – Debtor/borrower refers to the person or organization buying property through mortgage financing. Borrower has an obligation to pay back the loan amount to the creditor as per the terms of the mortgage-financing contract. Borrower is usually an individual or business buying the home or commercial property whichever the case may be. In case of default creditor has a legal claim to liquidate the security (pledged by the borrower) to recover the outstanding loan amount.
- Mortgage Broker – Mortgage broker is an intermediary that provides various services ranging from facilitating your house hunt to helping you find affordable mortgage financing that is suited to your particular needs. Mortgage brokers provide these services for a fee. Mortgage brokers may facilitate the mortgage financing process or may be involved only few steps as per your choice. However it always helps to have a professional on your side of the table.
- Attorney/Lawyer - Lawyers (specializing in property law) help you with the legal issues of a mortgage-financing contract. You should hire a lawyer to oversee the mortgage-financing contract to ensure that you are fully protected. He would negotiate the contract with the mortgage financing company and will ascertain that no unwanted clauses are included in the contract.
- Mortgage Insurance Company – Mortgage insurance company protects the lender against default by guaranteeing to repay (the loan) in case of non-repayment by the borrower. Mortgage insurance policies provided by different mortgage insurance companies may differ in the reasons of default they cover as well as the amount of cover they provide.
- Fixed Rate Mortgage Loans are loans extended at a fixed interest rate. This interest rate and monthly mortgage payments will not change the whole time the term of the mortgage loan.
- Adjustable Rate Mortgage Loans –are loans whose interest rate is dependent on market conditions. Although adjustable rate mortgage loans have higher risk than fixed rate mortgage loans they also offer higher returns.
- Convertible Mortgage Loans - are adjustable rate mortgage loans that can be converted to fixed rate mortgage loans after a certain period or at a specified time.
- Balloon Mortgage Loans - are loans in which you only have to pay interest in your monthly payments. Principal amount of the loan is not amortized over the life of the mortgage loan and becomes due at its end.
- Discount Mortgage Loans - are loans for which interest rate is set below the market rate for a specific time period at the end of which it will be increased to match the market interest rate.
- Cash back Mortgage Loans - are loans that pay you a lump sum amount at the end of the mortgage term. Most lenders have their own policies. Consequently this rebate can be either a fixed amount or a percentage of the total loan amount.
- Flexible Mortgage Loans - have been developed to adjust to the changing (financial) circumstances of the buyer throughout the life of the loan. Some features of flexible mortgage loans include higher monthly payments, no payments for a specific time period, lump sum payment or increased/decreased frequency of payments etc.
There are various types of mortgage financing products available in the market. You should keep in mind your distinct needs (such as your budget, desired payback period and interest rate etc) when shopping for mortgage financing. Never buy the first suitable mortgage-financing contract you come across. It pays to compare features of different types of mortgage financing contracts as well as comparing same type of mortgage financing across mortgage companies. Assess the mortgage financing very carefully to ascertain that you are not paying for services that you do not require or did not opt for. Mortgage points, home insurance, home warranties and hazard insurance are prime examples of these extra costs. Choose a mortgage broker with an immaculate record. It is always preferable to choose a broker recommended by a friend or relative. Do not let your emotions overwhelm you and bulldoze all common sense. Do not (try to) handle every smallest detail by yourself. Let the professionals do their job and plan to enjoy your new home! Some types of mortgage financing are mentioned below: