A mortgage is a loan or finance structure to lend money secured against a property. The most common form of a mortgage loan is a residential loan against a property. This is usually an owner occupier loan where the person taking the mortgage will be living in the property. A bank or money manager would lend the money needed to purchase the property.
How it a mortgage works:
A bank or lending institution will write up an agreement to have an ownership interest in the said property in return for lending the money to the would be home owner or borrower.
The agreement or mortgage will have an interest rate attached to the loan. This interest rate is the banks “payback” or income in return for the lending of the principal amount. The home owner id responsible for paying back over an agreed time frame payments incorporating an amount of principal and interest repayments. This would effectively mean the loan gets fully paid off over time with full ownership being transferred to the borrower or home-owner.
Different types of mortgages:
Interest Only. This is where you have a principal amount that does not change and you do not pay back. You payments are purely on the interest component and this is just to keep the loan maintained. At the end of a thirty year period you would still owe the same amount at the start. The repayments are usually lower as the principal amount is not included. Property investors use these types of mortgages predominantly as the full payment is tax deductible in several structures like in Australia.
Principal and interest. This type of loan is the standard mortgage type. This means you would end up paying off the whole amount of debt of the life of the loan made up of both types of payments. At the start of the repayment term your payments are mostly interest with the rest made up of principal. Over time as you slowly pay back the principal, the interest payments reduce proportionally. This then allows your payments to slowly gear towards more principal amounts being paid off. At the end of the loan the majority of your repayments would be principal. This is a sure way to have no debt at the end of the loan term.
How To Find The Right Mortgage:
You can either go direct to a bank or lending institution yourself or have a qualified mortgage broker do the legwork for you. Either way its worth knowing the basics before hand so you know the important points to look out for and ensure you are getting the best property loan for your situation.