Anatomy of a Mortgage

In exchange for getting this very large loan, the person then agrees to put the house up as collateral against the loan

Introduction

Mortgages were the original home loan agreement. In many ways, the mortgage changed the real estate market completely and turned it on its head in a very good way. Before the advent of the mortgage, the only way for people to go out and get what they wanted in terms of property was to pay for it outright. Since very few people possessed the means back then to pay for property outright, the ownership rights were only there for pretty much the upper middle class. From the middle class downwards, most were excluded from home ownership. Mortgages changed all of that, and to understand how profound a mortgage is, it is important to take a close look at exactly what a mortgage entails.

Agreement

The agreement for a mortgage is one that is the main point of everything else that follows. Under the agreement of a typical mortgage, the person has the ability to borrow money from a lender in order to pay for a house or a property. The amount of money they can borrow varies, but for a Conventional Mortgage, the maximum you can borrow is 80% of the lower of the appraised value or purchase price of the house. Options for mortgages above 80% are available by paying mortgage insurance, which I will discuss in another blog. In exchange for getting this very large loan, the person then agrees to put the house up as collateral against the loan, so that the bank has some way to save itself in the event that the person is unable to pay the loan back.

Interest Rates

Whenever people think about loans, very likely the first thing that they think about is interest rates. There are a number of different interest rates involved in different loans, but when you compare the vast majority of them to what is available under a mortgage, what you find is that the vast majority of those interest rates don’t really match up. The average mortgage has an interest rate attached to it of between 4% and 5% (depending on the loan to value and credit score) and the vast majority of loans that are available on the marketplace today, even if they happen to be secured loans, really can’t match up.

Repayment Terms

Just like with interest rates, the repayment terms for a number of different mortgages are very impressive when compared to a number of other conventional loans. When you’re talking about unsecured loans (i.e. credit cards), then obviously there’s going to be no comparison, but for the most part you will find that mortgage repayment terms are significantly easier to deal with than with most other loans. This is because (a) the collateral being used is extremely strong and (b) the term lengths are longer, so naturally that makes the monthly payments smaller.

Fees

There are some fees for mortgage payments relating to things like late payments and underpayments, but you will find for the most part that fees are not really that important in the grand scheme of the agreement itself. It is important to be aware of what the fees are, and to make sure to pay your mortgage back on time every month.

Closing Costs

Closing costs for a home mortgage can be significant. With the advent of the new disclosure laws that have taken effect in 2015, all fees must be disclosed by your lender at the beginning of the loan process. These fees include appraisal costs, title fees, recording and lender fees. Make sure you receive a lender disclosure at the very beginning of the process.

 

A Short History of the Mortgage

In the beginning, a mortgage was just a conveyance of land for a fee. The buyer paid the seller a set rate, with no interest, and the seller would sign over the land to the buyer.

Most people know what a mortgage is, due to the fact that many people have one. But, do you know how the mortgage itself came about? Here is some basic history on the mortgage and where it came from:

In the beginning, a mortgage was just a conveyance of land for a fee. The buyer paid the seller a set rate, with no interest, and the seller would sign over the land to the buyer. There were usually conditions that had to be met before the land would be the property of the buyer, just like today, but usually it was based upon the assumption that the land would produce the money to pay back the seller. So, a mortgage was written due to this fact, and the mortgage stayed in effect no matter if the land produced or not.

But this old arrangement was very lopsided in that the seller of the property, or the lender who was holding the deed to the land, had absolute power over it and could do whatever they liked, which included selling it, not allowing payment, refusing payoff, and other issues which caused major problems for the buyer, who held no ground at all. With time, and blatant abuse of the mortgage system, the courts began to uphold more of the buyer’s rights so that they had more to stand on when it came to owning their land. Eventually, they were allowed to demand the deed be free and clear upon the payoff of the property. There were still steps taken to ensure that the seller still had enough rights to keep their interest safe and make sure that their money was paid.

In the U.S., some states have created their own version of the mortgage, which is why they are referred to as “lien states.”  In 1934, mortgages began to be widely used again, and the Federal Housing Administration helped to lower the down payments on homes to make it easier for buyers to purchase a home. During that time, around 40% of people in the United Sates owned homes. Now, that number is closer to 70%, due to the lower interest rates.

Although mortgages today have evolved into many different forms, they are still basically the same essential contract that they were in the beginning. Now, there are many more laws and regulations to help protect the buyer, seller, and creditor. There are also many different ways to lock in a low interest rate, you just need to talk to your mortgage broker about what the rates are now and what kinds of programs they offer to keep those interest rates low throughout the life of your loan.