Mortgage 101

Got a mortgage? You’re not alone. Most American homeowners do. That explains why everybody is talking about the word “mortgage” nowadays. You hear people talking about it in the bus, at the restaurant, among neighbors, in schools, in the office, in the theaters, and yes, even in jogging lanes.

“My colleagues always talk about it during dinner break down at the station, “says Tim, a firefighter. “There’s home mortgage, mortgage loans, real estate mortgage, and a host of other mortgage-related discussion.”

But what, exactly, is a mortgage?

Here’s an illustration:

You want to buy a house. Unless you are Bill Gates with millions of ready cash, you don’t have enough money for the full purchase payment. (Now, don’t worry about it. Most Americans are in the same financial situation as you are).


To buy your dream house, you want to make a small down payment and pay the rest of balance over time on affordable monthly installments.

“Is this possible?” you ask. Of course, it is.

To do this, you contact a lending bank. The bank would “loan” you the full purchase amount of the house. This is a mortgage. You then use this amount to pay off the seller who walks off with a thick wad of bills and with the sweetest smile on his face. Now you and your family can move to your dream house and show off your friends what a good place you’ve got. Just remember to pay the bank the agreed monthly installment payment till you finish your home mortgage loan in full.

Types of Mortgage
There are various types of home mortgage to suit the specific needs of the homeowners. The most common are:
a.) Fixed Rate Mortgage
As the term suggest, monthly payment is fixed throughout the duration of the loan. Despite economic crisis, your lending bank could not increase your mortgage interest or your home mortgage loan.



b.) Interest Only Mortgage
A loan where the borrowers pay only the interest of the mortgage for a set period of time—from 5 or 7 years since the mortgage loan. After this period, the borrowers will start paying the interest AND a portion of the principal home mortgage loan amount.

c.) Balloon Mortgage
Similar to Fixed Rate Mortgage but on a short term basis. This has fixed interest rates and fixed monthly payments. Its advantage is that balloon mortgage offers lower interest rates than the prevailing market rate. You pay interest rate payments for a set time--- maybe 12 months or 18 months. After the contract term, borrowers pay the principal mortgage amount in one single payment.



d.) Reverse Mortgage
The term says it all. This is the reverse of a common “mortgage loan.”
In a regular mortgage, you “borrow” a lump sum of money from the bank and then pay it in installment, with interest, over time.

On the other hand, reverse mortgage is receiving monthly payment from your bank as long as you live. You use this amount as your monthly “income” to use in whatever you see fit. This is good for homeowners who have already full ownership of their house and have paid their regular home mortgage in full. House-rich but cash-poor senior Americans are eligible for this type of mortgage.

The total amount you can get from reverse home mortgage should not exceed the total equity of your house. You or your inheritors can pay off reverse mortgage when you die, when you sell your homes, or when you no longer want to live in your house.