A mortgage is defined as a legal agreement that is drawn between a building society, bank, etc., and the borrower of money in exchange for taking the title of the property of the borrower until the point of time when the borrower repays the principal amount along with interest. If the borrower fails to do the same, the title will of the property will lapse to the lender.
A mortgage involves a lot of paperwork that one needs to go through to get loan approval. It involves the following documents that one has to sign before the approval:
- Promissory note: This includes how one can repay the loan. It delves deep into the factors such as interest rates, the term of the loan, loan amount, when does the loan go into default and what exactly is the principal as well as the interest payment. The term of the loan can be as long as 30 years.
- Mortgage: Next is the mortgage document which involves pledging of property to the lender. There are various documents under this sector and it depends on the country and state where the transaction is taking place.
- Deed of trust: As the mortgage is basically an agreement between two parties for a certain transaction, it is sometimes necessary that a third party be present as a witness to the signing. In this case, the deed of trust comes into picture which mainly involves a third party or trustee.
What are the types of mortgages?
There are various types of mortgages that one can choose from. They are classified depending on the term until which one is willing to repay the mortgage. The following are the various types of mortgages:
- Fixed rate mortgage: In this type of mortgage, the interest rate is fixed. This implies that the interest rate will not vary over time and will remain constant throughout the lifetime of the mortgage. This ensures stability in one’s mortgage payment.
- Variable rate mortgage: Here, the interest rate is not fixed. The question that arises here is how are the rates determined. The interest rates vary according to a certain margin and an index. This index and margin determine the variation in the value of interest rates depending on the economy. It also goes with the adjustment period that one chooses.
- Short-term mortgage: This entirely depends on the borrower and if they choose to go for a short-term mortgage, it implies that the interest they will pay is less but the amount that they have to pay periodically will be more. One can take this up to 10-15 years to be called a short-term mortgage. There are mortgages for fewer years too.
- Long-term mortgage: In this type of loan, the repayment period can go beyond 40 years. In this case, the periodic payment is less but the interest amount is high.