How Do Mortgages Work

How do Mortgages work? What is a Second Mortgage? What should one consider while taking a Mortgage?
A mortgage loan is a loan for purchasing a house where the property bought is itself used to guarantee repayment of the loan. In essence, you pledge your home in return for money. You own the property, but the creditors can take possession of the property or sell it if you are not able to repay the loan. At the end of the loan period, your home will become your property.

A mortgage loan typically consists of two parts:
• the capital which is the amount of money you borrowed to buy your property
• the interest which is the amount the lender charges for lending you the capital

There are two ways to repay the loans: 

• Repayment and Interest Mortgage: You will repay both the capital and the interest over a set period of time. 

• Interest-only mortgage: You will be paying only the interest on your loan during the mortgage term. When the term ends, you will still have to pay off the capital. 

Second Mortgage:
A second mortgage is a loan or mortgage that is subordinate to a loan taken against the same property. It is the second loan in sequence. In real estate, a property can have multiple loans against it. The loan which is registered with county or city registry first is called the first mortgage. The loan registered second is called the second mortgage. A property can have a third or even fourth mortgage but those are rare.

They are subordinate to the first mortgage because the first mortgage has to be paid off first in case of default before the second mortgage gets any money. Second mortgages are riskier for the lender and they generally charge a higher interest rate on them.

Choosing a Mortgage:
Shopping around for a good rate from a quality lender is a crucial step. You could take the help of a mortgage broker to identify which lenders can offer the best rate for you. Mortgage brokers provide the service of tracking rates from a variety of lenders and will charge a percentage of the final mortgage amount as a fee at closing.

Carefully consider your options before making a choice:

• Interest rates: Mortgages can have either fixed or adjustable interest rates. In Adjustable Rate Mortgages (ARM), the interest rate is fixed for a period of time after which it will periodically adjust up or down depending on the market rate. These loans usually tend to have a lower rate initially and are thus attractive to the borrowers. 

In Fixed Rate, the interest rates are set and do not change for the term of the mortgage. This type of a mortgage is popular when rates are falling and the borrower wants to lock in on the low price. 

• Points: You can pay more money up front in order to reduce the interest rate on your mortgage. This is known as paying "points". Each point is equal to one percent of the size of the loan. Points are a good option for buyers planning to live in the home for a long time because the interest rate can be reduced significantly. 

• Term: The two most popular options are 15- and 30-year terms. In the longer term, you will pay more money in interest during the course of the loan but the monthly payments will be smaller and there are some tax benefits to paying mortgage interest. The interest rate will be slightly lower for a 15-year mortgage, but the monthly payments will be higher. The shorter term option will enable you to own more of your home sooner.