Mortgages

The word mortgage originates from the Old French term for "death pledge", and while mortgages are no longer quite that serious, they're still a major decision for most people. A mortgage is your promise to repay a loan taken against a piece of property, typically your home. You pledge the property as security against repayment of the loan.

The loan itself is evidenced by a note or deed of trust, but the mortgage is the transfer of interest in the property from the seller to the buyer. If the buyer defaults on the loan, the mortgage usually has provisions allowing the seller to take back interest in the property via repossession/foreclosure proceedings.

In many cases these days, a bank or other financial institution functions as an intermediary and will actually handle the processing of payments and, if necessary, foreclosure. The financial institution is listed on the documents signed when the property is transferred.

There are different types of mortgages, and selecting the best one depends on the buyer's needs. A favourite for some years has been the fixed-rate mortgage, where the interest rate is set for the term of the loan. Variable mortgages have an interest rate that is tied to a base interest rate (typically the Bank of England's base rate), and changes as that base rate changes. The number of changes per year are typically limited and set out in the agreement. Many variable mortgages are capped mortgages, where the interest rate changes are capped on a yearly and lifetime basis.

Newer types of mortgages, such as interest-only and buy to let mortgages have become popular, but should be used with care. These types of mortgages are well-represented in the higher numbers of borrowers having trouble repaying their loans or actually defaulting on their mortgages.

Most mortgages are repayment mortgages, meaning you pay the interest due on the principal balance each month, plus an extra amount that reduces the principal sum. The next month your interest payment is then lower, and more of your total payment goes towards the principal, reducing it further. When the mortgage reaches the end of its term, you own the property and the loan is retired.

As property values have risen, the number of first-time buyers has fallen due to the rising cost of down payment funds and closing costs. However, new mortgages have arisen to help with this situation. Some of these mortgages require a lower deposit than traditional mortgages, and some require no deposit at all. Of course, the interest paid over the term of the loan will be higher, but for many people this offers their first opportunity to purchase a home.

There are usually costs associated with a mortgage. Stamp duty is paid on purchases over 125,000, (currently under revision) and arrangement fees and/or broker fees may also be charged, depending on the type of mortgage lender chosen.

Mortgage indemnity insurance may also be required to obtain the mortgage. This insurance actually protects the lender when the borrower has made little or no deposit. The lender is protected against the borrower missing a payment or actually defaulting on the loan. This insurance is often not required when the borrower makes a larger deposit.

Using mortgage comparison websites can help determine the overall cost of various mortgages to discover the one best suited to a particular purchase.

Owing to the present worldwide 'credit crunch,' mortgages are becoming more difficult to obtain. Larger deposits than ever before are being demanded by lenders and they are becoming much more selective about who they lend to. The public are now paying the price for bad business practices by the banks over the last ten or so years.
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