What are Mortgages Loans and how they work?

What are Mortgages Loans and how they work?

Owning a house is a fundamental part of life and sometimes a house may cost more than what a person can afford. The easiest way to get past this price issue is a mortgage loan. These loans are issued by banks or other financial institutions to individuals who need money to buy their own house.

Mortgages loans apply a certain percentage of interest, which adds to the amount of money borrowed. These interests rate can differ depending on the years of the term. Mortgage interest rates in Toronto, which is one of the most competitive markets, can vary from 1.69% to 3.24%.

How Do Mortgages work?

Mortgages are like a win-win situation for both the borrower and the lender. With the money, the borrower can live in their new home with a low-interest rate. While on the other hand if he/she fails to repay it, then the bank can sell the property to get its money back.

Before lending money, the lender and the borrower agree on a set of terms and conditions. Then they fix the number of years the borrower will take to repay the money with interests. They also decide what the borrower has to pay at signing. The terms and conditions also include the interest rate type.

Types of Interest Rate

  • There are two types of interest rate, one is the fixed-rate, and the other one is adjustable rate.
  • In the fixed-rate, the interest rate remains the same throughout the term of the loan.
  • But in the adjustable rate, the interest rate can be increased or decreased depending on the lender.
  • Some lenders also follow a hybrid rate type. In this, they follow either of the rate types for some years and the other type for the rest.
  • One of the hybrid types is 7/1 adjustable-rate mortgage or ARM. In this, the borrower has to pay 7 years in fixed-rate and the last one year in adjustable rate.

Different Kinds of Mortgages

There are several other kinds of mortgages for the borrower to choose from. Mortgage interest rates in Toronto also differ for different mortgages.

1. Balloon Mortgages

  • In this the initial pay is low, but it increases till the end of the term. It is preferred for those who expect a huge profit near the end of their term.
  • Some also use this type of mortgages for real estate purpose, where they sell the house at the end of the term period.

2. Government-backed Mortgages

Governments also provide mortgages to some eligible citizens. It is mostly provided to those who do not have proper housing, which is one of the basic requirements for living.

3. Second Mortgage

The borrower sometimes can take another mortgage loan keeping the home’s equity as collateral. This type of loan is also known as a home equity loan.

It also has its own sets of disadvantages. Some of these disadvantages are listed below-

  • The borrower has to pay more than what they borrowed.
  • Those who plan to sell the house at the end of the term can experience a loss if the value of the house the locality falls.

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