Mortgage Central Spot

Everything about Mortgages

The term mortgage normally denotes the pledging of an immovable property as collateral security for a loan. Vehicle financing and household goods financing are not generally termed as mortgage, even though technically there are not many differences in the procedures. Such loans are termed as hypothecation. Property mortgage is generally of two types. Home mortgage is the most common among them, while mortgaging a property, with or without any construction on it, is also resorted to on several occasions.

In the prevailing economic situation in most of the countries, including the developed and developing nations, it had become difficult for a person to save enough money for the outright purchase of a house. After the collapse of the traditional joint-family system, own housing had become one of the prime goals in life even for young couples. Only such persons who are employed in jobs that are subject to frequent transfers to different cities and states or countries prefer to opt for rented houses. Even among them, several decide to go in for an own house, with the availability of easy financing options nowadays. Home mortgage is seen more as a saving or an investing option rather than as a debt.

Similarly, business houses also choose property mortgage as a means of raising funds for the development of their business. Either the property where they are conducting their business or other properties that belong to them but are in nearby locations are offered as mortgage for the term-loans that they require either for capital investment or for working capital. A few business houses even resort to so-called third party mortgages of pledging the properties of their directors or others related to their business for the purpose of raising the needed funds. Second mortgage on a property that is already under a mortgage is also a possibility, both for home mortgage and for business loans.

Whatever be the type of mortgage, a few vital points have to be considered carefully at the outset. The amount of the loan that is being sought, the repayment period of the loan, the interest rate options and the utility of the loan amount have be properly evaluated at the beginning itself to avoid problems or defaults at a later period. A person planning for a home mortgage has to decide whether the house purchase is going to be a new construction or an existing house.

If it is a new house, the person has to decide whether he/she is going to find the house on one’s own efforts or is going to approach a real estate broker. Further, a decision has to be taken as to whether to opt for a construction by private parties or by government agencies. There have been several instances where dubious construction firms had fleeced prospective homebuyers. If it is an existing house, certain legal aspects like whether there is already a mortgage on the house, the present and future value of the house in the market and other points like this have to be taken into account.

The period of repayment is another important item in the agenda. At present, financial institutions provide loans with repayments ranging from 3 years to 30 years for property mortgage. The current and future monthly/annual income of the individual or the business house, the principal loan amount, the interest rate, etc. have to be computed with care to select the right repayment period to avoid future defaults.

Selection of the most appropriate interest rate scheme is also paramount in property mortgage. In the last 2-3 years, interest rates have been increasing all over the globe. To cite an example, the Federal Reserve of the United States was keeping its prime rate at 1% before June 2004. Between June 2004 and June 2006, the US Fed hiked the rates continuously till the interest rates reached 5.25%. The situation is the same in nearly all the nations of Europe, Asia, Africa, Americas and Australia. Under the circumstances, the interest rates cannot rise much further. A person opting for a fixed interest rate prior to June 2004 would immensely benefit now in the regime of higher interest rates. On the other hand, in the present scenario where the interest rates could only move down in the near future, adjustable or variable interest rate is the best option.

From the above, it is clearly seen that planning for mortgage loan without proper preparation is bound to be a risky venture. There is no point in acting in undue haste now and repenting later. The location of the property, its present and future market value, the amount of loan sought, the period of repayment, the interest rate options, the approach of the purchase either on one’s own or through an agent, the constructing agency, all have to meticulously evaluated to mitigate any future risk.

To conclude, the points that have to be considered in a property mortgage are listed below for easy reference.

• Decide on the property that is to be mortgaged
• Evaluate the current and future market value of the property
• Carefully consider the loan amount that is sought
• Take into account the present and future monthly/annual income
• Determine the period of repayment wisely
• Opt for the best possible interest rate option

Always approach a proven real estate agent with good track record to have multiple choices in property purchase and in the advice of mortgage alternatives, even if it involves a marginal amount as agent commission
Be sure about the constructing agency; make a thorough inquiry about their background and past record
Follow all legal procedures involved in the purchase and mortgage of property to avoid unwanted litigation or legal problems later.

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