Taking a mortgage envisages taking a loan for a home or building with the property being used as collateral. Taking a mortgage is a common method of financing for all those who want to buy a home or any property. A mortgage is essentially a loan taken by someone who wants to buy a home but doesn’t have enough funds to make the purchase.

The purchased property would be the collateral for the lending institution to lend the money. Every month, repayment installments would need to be made until the loan is cleared. Once the loan is cleared, the property would be transferred to the name of the individual, and they will get its ownership. Here’s a breakdown of everything you need to know about a mortgage:

1. How a mortgage works

Buying a home is an expensive proposition, and most people do not have the money required. This is where taking a mortgage comes into the picture. To take a mortgage, a down payment needs to be made, which would usually range from 3.5% to 15% of the total value of the home. This would be decided by the lender, and the interest rate for the mortgage would also be decided in advance.

Under the mortgage, the home would be the collateral, which means if the homeowner fails to repay the loan, the lender has the option to foreclose the mortgage, take over the home, and sell it to recover the outstanding dues.

2. Mortgage payments

Every month, the individual needs to pay an amount to cover the interest charged and the principal. The amount to be paid is decided on the basis of the term of the loan. This is usually 25 years, but it can also be for a lesser duration or even for more than 30 years. The mortgage amount needs to be repaid until the loan is cleared, after which the ownership is transferred to the individual who took the loan.

3. Terms of a mortgage

Basic terms related to mortgage that you need to know include the following:

• Principal: This is the amount of money taken as a loan.
• Down payment: This is the minimum payment the loan taker needs to pay to be able to take the loan. This is usually 3.5% of the total home value, but it may be higher as well. The remaining amount is given as a loan, in this case, the remaining 96.5%.
• Interest: The interest rate is the amount you need to pay to the lender in return for taking a mortgage, and it is expressed in terms of a percentage.
• Term: This is the duration of the loan, which can be 10 years, 15 years, 25 years, or even 30 years. The loan needs to be repaid within this term.
• Foreclosure: This happens when the loan cannot be repaid and the bank takes possession of the home placed as the collateral.