Home Mortgage

A mortgage is a process in which a property (real or personal) is used as security for the repayment of a loan. In case of a Home Mortgage, the loan is taken for buying a house, but until and unless the repayment is complete, the ownership is not transferred to the borrower from the lender. In case of a Home Mortgage, the particular house, which anyone is going to buy, is kept as security or pledge. For example, someone is going to buy a home and he goes to the bank for obtaining a loan. He has to pledge that particular house to the bank. If there is a default on behalf of the borrower, the bank holds the claim on that particular house. In case, the homebuyer is unable to make the principal and/or interest payments on his or her mortgage, the bank has every right for eviction of the tenants and selling the house. It will use the sales proceeds for clearing the mortgage loan.

Home Mortgage or Residential Mortgage is the main device for financing private ownership of residential properties in many countries. The amount of a mortgage loan is often dependent on the concerned person's credit ratings or credit history.

The basic components of a Home Mortgage are:

Property: The house for which the loan has been taken.
Mortgage: The pledge or security created by the lender on the property.
Borrower: The person who is taking the loan or who has an ownership interest on the property.
Lender: A bank or a financial institution or any other lending company.
Principal: The original loan amount. As it is repaid, the principal is reduced.
Interest: It is a financial charge for using the money of the lender.
Foreclosure or Repossession: It is the probability that the lender may foreclose, seize, or repossess the property under certain conditions.

Residential Mortgages or Home Mortgages are long-term loans. The payments are similar to annuities and they are calculated according to the Time Value of Money Method. The lenders finance Home Mortgages in order to earn interest income and they collect the funds either by taking public deposits or issuing bonds in the market.

The factors regulating Home Mortgage are: Interest Rates, which may be fixed for the whole life of the loan or variable where the interest rate can go up or go down, term of the Home Mortgage, payment amount and frequency, and prepayments.

Usually, there are two types of amortized loans. They are Fixed Rate Mortgage (FRM) and Adjustable Rate Mortgage (ARM) or floating rate or variable rate mortgage. In the United States, Fixed Rate Mortgage is the standard form of Home Mortgage. Many other countries follow the norms of floating rate mortgage. Combinations of both are also available.

In a Fixed Rate Mortgage, the interest rate and periodic payment remain the same for the entire loan term. In the U.S., the most common terms are 15 years and 30 years.

An Adjustable Rate Mortgage has a fixed rate of interest for a certain period, and then it goes up or down periodically according to adjustments with some market index. The Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index (“T-Bill”) are the common indices in the U.S.

The lenders expect that the borrower makes a down payment or contributes a part of the property's cost. This down payment is expressed as a portion of the property's value. This is called the Loan to Value Ratio (LTV), which is calculated as the ratio between the loan amount and the value of the property. So in case of a mortgage where a down payment of 20% has been made, the Loan To Value Ratio is 80%.

The determination of the value of the property is done in three different ways: Actual or Transaction Value, Appraised or Surveyed Value, and Estimated Value.

There are various ways of repaying the mortgage loan. They are:

Capital & Interest Repayment
Interest Only Repayment
No Capital or Interest Repayment
Interest and Partial Capital Repayment
Foreclosure and Non-Recourse Lending

In the U.K., the rate of interest is calculated in a variable rate, which can either be the standard variable rate of the lender or a tracker rate, which is linked to a Bank of England (BoE) repo rate (or sometimes LIBOR). The rates may be a fixed rate, a capped rate, a discount rate, or a cash back mortgage.
The leading Home Mortgage Providers include Ginnie Mae, Fannie Mae, Freddie Mac, Global One Lending, Dollar Bank, Genworth Financial, Wells Fargo, Mortgage Choice, NyKredit, IIB Bank, E-Loan, and Chevy-Chase Bank.

Thus Home Mortgage has opened up a paradigm shift in the field of home financing solutions.