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Morgage loans explained

Very few people enjoy throwing their money down the drain

. If you're one of them the chances are you've already become a homeowner. Instead of filling the landlords pockets your monthly payments contribute towards increasing your home equity. If, however, mortgages are still something you don't know very much about - read on. This guide is to introduce you to the basics of mortgage loans and translate the jargon used into plain English.

What is a mortgage? Quite simply, it's a loan you take in order to purchase a property. Unless you have enough money to buy with cash, these secured loans are the only way to get onto the property ladder. One thing worth mentioning straight from the start is that while mortgage will certainly let you own a home someday, it does come with a whole lot of new responsibilities. Landlords tent to be understanding when it comes to late rent payments, banks do not. If you fail to repay your monthly fees your home will be repossessed. Furthermore, even a single late payment will have a negative impact on your credit score so make sure that your monthly repayments are set at a reasonable level.

Typically, mortgage comprises of two parts - capital and interest. The former is amount bank pays the property seller (you never actually get to see the money) and latter - the fee you're charged for taking the loan. Amount of capital is very straight forward, it's what the property is sold for. If the property is advertised for say, one hundred thousand - that's the capital of your future mortgage.

Things get a little more complicated with interest. It's measured in APR which stands for Annual Percentage Rate. It gives you an indication of how much the bank will charge you for each year before the loan is paid off in full.

Sounds confusing? Let's get back to the previous example and assume you've found an inexpensive property for hundred thousand. During the mortgage application you will need to decide how long will you pay the loan back for. Most people decide on something between 20 and 30 years depending on their financial capability. During that time each and every year your lenders will see how much do you still owe them and calculate interest based on that amount.

The conclusion: by spreading the mortgage over longer period of time your monthly repayments will be lower but the overall amount paid back will be higher.

Morgage loans explained

By: Grist Lok
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Morgage loans explained