Mortgage Loan - Meaning, Definition & Types
Before we start talking about mortgages, let us find out what does ‘mortgage’ mean?
In simple words, a mortgage is a type of loan that can be used to purchase or refinance a home. Mortgages are also known as mortgage loans.
What is a Mortgage Loan?
A mortgage is a loan that is provided by a bank or a lender that enables an individual to purchase a home or property. Mortgages allow you to purchase a home without having to pay the entire amount upfront.
While it’s possible to take out loans to cover the entire cost of a home, people commonly secure a loan for about 80% of the home’s value. The loan must be repaid in installments. The home purchased serves as collateral for the money borrowed to purchase the home.
How Does a Mortgage Loan Work?
When you get a mortgage, your lender gives you a set amount of money to help you buy a house. You agree to repay your loan with interest over several years. This means that you don’t own the house until the mortgage is paid off.
The interest rate is determined by two factors - current market rates and the lender's willingness to take a risk in lending you money. You can't control current market rates, but you can influence how the lender perceives you as a borrower.
The higher your credit score and the fewer red flags on your credit report, the more likely you are to appear as a responsible lender. Similarly, the lower your DTI, the more money you'll have to make your mortgage payment.
The amount of money you can borrow will be determined by what you can afford and, most importantly, the property’s (a house, in this case) market value as determined by an appraisal. This is important as the lender can’t lend more than the house's appraised value.
Types of Mortgage Loans in India
Mortgage loans in India can be divided into two categories based on the interest rate:
- Mortgage loans with fixed rates
- Mortgage loans with variable or floating rates
- Simple mortgage
- Usufructuary mortgage
- Subprime mortgage
- English mortgage
Fixed-rate mortgage loans are provided to customers at a fixed rate of interest. Customers can get a good idea of their loan liability with these types of mortgage loans even before they apply for one.
This is because the fixed interest rate can be used to calculate the fixed monthly installment amount, allowing the customer to be certain of his or her loan liability.
Variable or floating rate mortgage loans are loans with a variable interest rate. This interest rate fluctuates with changes in the bank's base rate, which is directly dependent on the Reserve Bank of India's repo rate.
The performance of the economy and stock market provides a lot of feedback on variable interest rate mortgage loans. The RBI's actions are also reflective of the state of the economy.
So, in economies where customers are confident about growth and progress, variable-rate mortgage loans thrive more than in stagnant or low-growth economies. In the case of floating rate mortgage loans, the risk of higher rates and the benefit of lower rates have the same probability.
The mortgage loans in India can also be classified based on the nature of the contract between the lender and the borrower with regard to the terms and clauses of the mortgage loan.
In a simple mortgage, the borrower's property is not transferred to the lender, but the lender has the right to sell the borrower's property and recover the proceeds for loan repayment if the borrower fails to repay the mortgage loan.
In the case of a usufructuary mortgage, the borrower has the right to sell the property to the loan's lender, allowing him or her to receive an income that can be applied against the principal and interest amount of the mortgage loan.
Subprime mortgage loans are those made available to borrowers who have a poor credit history. This means that the interest rate on these loans will be higher. This is to compensate the lender if the loan applicant fails to repay the mortgage loan on time.
In the case of an English mortgage, the borrower agrees to give up his or her property completely to the lender if he or she is unable to repay the loan by a certain date. However, once the loan is paid in full, the property is returned to the borrower.
What is a Reverse Mortgage Loan?
A reverse mortgage is a tailored financial arrangement designed to meet the funding requirements of senior citizens. Homeowners over the age of 60 can use the equity value of their home to obtain funds through this loan facility.
A borrower's initial principal limit is determined by the current market value of the property, the borrower's age, the interest rate charged, and the lender's margin.
This amount includes the borrower's total payment as well as all lender charges such as interest, processing fees, and so on. Borrowers can receive this financial assistance in a lump sum or on a monthly, quarterly, half-yearly, or yearly basis.
A reverse mortgage loan, unlike a mortgage advance, does not impose an immediate liability on borrowers. Lenders begin loan recovery only when the borrower permanently ceases to reside in the property, decides to sell it, or dies.
What is a Farm Loan Mortgage?
Most of the farmers in India end up borrowing agricultural land from private lenders who charge a very high rate of interest. To help farmers in India by offering them financial aid when required, many banks in India offer farm loan mortgages or loans against agricultural land.
If a farmer owns the land, that land can be used as collateral to obtain a loan from a bank or financial institution. When a borrower pledges agricultural land in exchange for money, this is referred to as a loan against agricultural land.
Loan against agricultural land is intended for crop cultivators such as farmers, planters, and horticulturists. It is not available to businessmen or professionals. In most cases, the farmer does not need to provide Income Tax Returns to apply for this type of loan.
Some other features of this mortgage are:
- Least amount of documentation.
- The loan tenure can be up to 20 years.
- No hidden fees.
- Flexible repayment plan.
- Quick turnaround time.
- Funds can be used to set up a storage silo or a greenhouse.
What is a Conventional Mortgage Loan?
A conventional mortgage, also known as a conventional loan, is any type of home buyer loan that is not offered or guaranteed by a government entity. Conventional mortgages are available from private lenders such as independent lenders, credit unions, and mortgage companies.
Conventional mortgages typically have a fixed interest rate, which means that the interest rate does not change during the loan's term. Conventional mortgages or loans are not guaranteed by the federal government therefore, the lenders typically have stricter lending requirements.