Do you think you know what a mortgage is? It's easy to say yes, but there's a long way to go from there to really understanding how it works. Do you want to go through it? Well, that's what we're going to do so that after finishing reading this article you'll understand how a mortgage really works . This way you'll be able to choose the best mortgage for you, the one that really suits you.
What is a mortgage and how does it work?
A mortgage is a loan secured by a mortgage. What does that mean?
A mortgage is a loan where the house you buy acts as collateral. That is, in the event of non-payment, the financial institution can execute the collateral or, in other words, claim the house to settle the debt incurred.
This is what a mortgage loan is and how a mortgage works. You request money (capital) that a financial institution lends you at a certain interest rate and that you pay back month by month in the form of installments. If all goes well, after a while you will have finished paying off the mortgage loan and the house will be yours (remember that once you have finished paying off, there is a key step: the lifting of the mortgage.)
What elements make up the mortgage
You already know how a mortgage works in a schematic way. Now we are going to go a step further, because it is one thing to know that it is a loan and another to know its ins and outs. The latter is what will really help you choose the mortgage you want and get it right.
The most common thing when choosing a mortgage is to look at the monthly payment, which is what you are going to pay each month. This information is also often used to find out how much house you can afford with your salary.
In the end, the installment is the result of the other elements that make up a mortgage loan . Namely: the capital, the interest rate and the term.
Now you will understand how they are interrelated and how each one affects the mortgage payment and operation.
Mortgage capital
This one is easy. The mortgage principal is the money you borrow from the lender , which will typically be 80% of the purchase value or appraisal value of the home at most.
The more money you need, the larger the mortgage and the higher the payment will tend to be. This correlation is very simple and easy to understand.
The interest rate
This is the interest rate at which the financial institution lends you the money and there are several types. In fact, when talking about mortgage rates, the most common thing is to refer to the interest rate that is applied.
There are three types of mortgages depending on the interest rates they charge: fixed-rate, variable-rate and mixed-rate mortgages. Here's how each one works:
• Fixed-rate mortgages , which as their name suggests, charge the same interest rate throughout the life of the loan. That is, with a 3.5% fixed-rate mortgage, that will be the percentage of interest you will pay until the end.
• Variable rate mortgages , which are mortgages where the interest rate changes. These types of loans have a reference index (normally the Euribor) to which a spread is added. For example, Euribor + 1%. The interest rate is reviewed on a half-yearly or annual basis and is adjusted to the index plus the spread, which may be higher or lower than the previous figure.
• Mixed-rate mortgages . These loans combine an initial fixed-rate period and a variable-rate period afterwards. That is, you start paying a fixed rate at the beginning of the mortgage and after a few years they change to a variable rate. As they can be a bit more complicated, here you can see what a mixed mortgage consists of .
The interest rate directly affects the mortgage. The higher the rate to be paid, the higher the monthly loan payment, as is logical.
Amortization period
This is the duration of the mortgage, the number of years of the loan. This data is key to the functioning of the mortgage and the monthly payment.
The golden rule is very simple. The longer the mortgage term, the lower the monthly payment. The reason is very simple, the money to be paid is distributed or divided over more months and, therefore, the monthly payments are lower.
In return, the total interest on the mortgage may be higher because you are paying interest for more years.
You can consult all this information and much more in the mortgage amortization table , which is one of the documents you will receive before signing the mortgage.
