There are several ways to buy a house and invest in real estate. The most common and perhaps “easiest” way is to buy a home is with a mortgage loan. Here we explain what is and how a mortgage loan works.
What is a mortgage?
A mortgage loan is a loan that allows you to acquire a property. It is used to buy a house, a department, a commercial space, a plot of land, or even remodel or build. These credits charge an interest that can be fixed or variable and has a lifetime typically predefined in the medium or long term.
A mortgage loan is a loan that allows you to acquire a property. It is used to buy a house, a department, a commercial space, a plot of land, or even remodel or build.
In short, it is like any other credit, with the main characteristic that they are large amounts, have medium or long terms, and that their main objective is to be used in some real estate investment.
Categories of main mortgage parts
You will have to foreclose on your house if you don’t pay your mortgage.
- Down payment refers to your purchasing capacity as its rate depends on the type of lender, usually around 20%.
- Principle balance – An amount you owe the lender as mortgage relates to the principal balance.
- Interest rate – Lenders lend you paid money in the form of interest. You have to pay it with the debt payment at the time of payoff. It implies the exact amount that you will have to pay beyond your principal balance.
How do mortgage loans work?
There are different types and differences between mortgages, mortgage loans, and other similar products. But in general, they all work in similar ways.
The interested user requests the credit from a bank, financial institution, online platform, or similar. In the vast majority, already with an idea (vague or specific) of the type of property you want to acquire.
The bank or financial institution (lender) carries out a study to analyze the ability to pay and the responsibility of the person requesting the loan. In this study, we review the Credit Bureau bank accounts, among other things, and the analysis determines if it is a loan candidate and also the rate and conditions! That’s why we insist on taking care of your credit history, since the better the score you have, the better credit score that will be offered (cheaper and with better conditions). Here are some tips to improve your score in the credit bureau.
Suppose the researched user complies with the requirements established by each institution. In that case, the lender provides him with an amount of money and establishes the costs and conditions such as the interest for the use of the credit (it can be fixed or variable), the term (goes typically from 5 up to 30 years), among others. Here also forms and payment periods (usually monthly) are established. Some of these are negotiable, so it is important to know the options of different places before deciding.
Once the loan is approved, a contract is generated, the bank pays directly to the seller of the property, and the property remains as collateral in the name of the lender.
After that, whoever receives the credit must pay as agreed to the lender.
The property is released until the end of the credit, changing the owner’s name at the end of paying.
The costs of mortgage credit
And, of course, like almost any other credit, a mortgage costs. That lender wants a profit for lending you hundreds of thousands of pesos for several years. In another article, we will explain each type of cost in-depth, but here we explain the most common costs of mortgage loans.
You should know that a mortgage loan involves at least two different payment concepts: the initial payments and the monthly payments. The percentage may vary, but on average, mortgages lend up to 80% of the property’s value. It means that you must have saved 20% of the property’s value for the initial payments and cover the remaining 80% with monthly payments.
Initial payments:
These are the necessary payments to start the loan. They include things like the down payment, opening cost, notary expenses, taxes, etc.
Monthly payments:
These are the constant payments throughout the life of the loan, which include the contribution to capital, interest, insurance, property costs, among others.
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