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Buying your home is one of the biggest achievements in life. However, it is also one of the most important financial decisions. Therefore, you should take your time and not rush into any decision.
With the rising real estate costs, it is most likely that you may not have the entire amount required to purchase the property. Therefore, you may avail of a loan from a bank or a non-banking financial company (NBFC).
What is a mortgage?
A mortgage is a type of secured loan that is taken for purchasing a home, land, or other types of real estate properties.
The borrowed amount is repaid over a period in regular instalments comprising principal plus interest.
The property is used as collateral. Moreover, you may apply for this loan either from a bank or an NBFC. To qualify for the loan, you need to meet certain requirements, such as minimum income, credit score, and down payment.
What is a mortgage loan?
A mortgage loan is also a secured credit facility where you can borrow a certain amount using an existing asset as collateral.
It is a popular type of financing as it allows you to borrow a higher amount for a longer period.
This type of loan is usually given against an immovable asset like your home or commercial property. It is also known as a loan against property (LAP).
How does a mortgage work?
Such debt is often for a longer duration, such as 15, 20, or 30 years. During the loan tenure, you repay both the principal amount and the interest.
Generally, the total repayment amount is divided into equated monthly instalments (EMIs), which comprise principal and interest components.
Finally, at the end of the tenure, you become the owner of the property.
Every month, a portion of the EMI is adjusted against principal repayment and the balance against the interest.
Initially, a higher amount is towards the interest payment. As you continue paying the EMIs, a higher amount is adjusted towards the principal repayment. In case of default or delays, the lender may repossess your property and sell it to recover any outstanding dues.
Types of mortgages in India
There are mainly six types of mortgages in India, which are as follows:
Simple mortgage
You borrow the money by offering an immovable personal asset as collateral. If you fail to repay the loan amount, the lender can sell the asset to recover their dues.
Mortgage by title deed deposit
You deposit the title deed of the mortgaged property with the lender to avail of the loan.
Usufructuary mortgage
Under this structure, the possession is transferred to the lenders. They receive profits or rent from the property and this type of mortgage does not create any personal liability for you.
Mortgage by conditional sale
In this structure, you sell your property on the condition that it becomes effective if you default on the repayment. The agreement is void when you repay the entire amount with the interest cost.
English mortgage
It establishes a personal liability for you and the mortgaged asset is transferred to the lender with the condition that it will be recovered after you repay the entire due amount.
Anomalous mortgage
Any mortgage that does not qualify under the above-mentioned types is considered here.
Mortgage payment structure
The borrowed amount is repaid in monthly instalments over the loan tenure. The EMI comprises the following two components.
Principal
This is the loan amount disbursed by the lender at the start of the tenure. Initially, a lower portion of the EMI is used towards principal repayment.
Interest
Lenders levy a certain mortgage loan interest rate, which is the cost of borrowing the money. At the start of the tenure, a higher portion of the amount is used for paying the interest.
However, as you regularly pay the EMIs, a larger portion is adjusted towards principal repayment.
Generally, the longer the loan tenure, the higher will be the interest outflow and vice versa.
Steps to find the best mortgage
You need to conduct extensive research and shop around to find the best deal. Spend some time exploring different options online to compare various factors, such as loan amount, tenure, mortgage loan rates, processing fees and other charges, and terms and conditions.
Here are some things you can do to find the best deal.
- Check your credit score and if required, take some time to improve your score to get the best deal.
- Know all the available options and familiarize yourself with common terms and conditions.
- Compare the different rates and terms offered by various lenders.
- Read the agreement thoroughly and check the fine print to ensure there are no surprises in the future.
Useful mortgage terminologies to learn
- Collateral: The asset given as security to cover the loan amount.
- EMI: This is the monthly amount you will pay towards loan and interest payments.
- Tenure: It is the duration over which you repay the borrowed amount.
- Interest: The cost of borrowing can either be at a fixed or flexible rate.
- Loan to value (LTV) ratio: This is the ratio between the loan amount and the property value.
Things to remember before opting for a mortgage
- Ensure your credit report is correct and get any anomalies rectified before applying for the loan.
- Determine how much loan you can afford and do your homework.
- Gain a preliminary understanding of how these loans work and know the common terms and conditions like interest rates, tenure, and loan amount.
- Check processing fees, prepayment charges, default penalties, and other costs.
This type of loan can be useful to meet personal or business fund requirements. However, like all loans, you must repay them on time to avoid severe consequences and late payment charges.
Take time to check out different options and make an informed decision to avoid facing any financial crises.
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