A legal contract by which a loan is granted by a bank or a lender to a person with his or her property as security is called mortgage. The loan is to be repaid along with interest and other costs. Once this is done, the contract ends. If the loan is not repaid, the bank or the lender can sell the property to cover the debts. This process is known as foreclosure which negatively affects your scope of taking loans in the future. Let us see what are the advantages and disadvantages of mortgage.
Advantages of Mortgage
The cost of property has increased like anything in the last couple of years. With lesser hike in people’s salaries, it is impossible to think of buying land or house. That is where mortgage comes to help. A mortgage loan definitely helps increase the buying capacity of people
The mortgage loan is granted with your property as security. So, the lender need not worry about the loan not being repaid. If anything goes wrong, the lender still has a valuable property to rely upon. It can be sold to cover the debts. Due to this option, the interest rate on mortgage loans is lower.
Easy to repay
When you take a loan, you do not have to repay the amount in one go. It can be paid as monthly installments. For example, you can avail loan over a 25 year term which means that you have 25 years to repay the loan as installments. So, one installment is not as big an amount when compared to your salary which makes repayment easy.
Better credit score
A good credit score is guaranteed in the credit report if the current status of the mortgage loan is good. That means if you have correctly paid the installments, it helps you get other loans with lower interest rates. On-time payment of loans would improve your credibility in the eyes of the creditors.
Availing mortgage loans qualify a person for income tax benefits. They reduce the amount of tax to be paid to the government. The money you pay as interest may be excluded from the tax. This is the reason why people take a second loan for a new property or a house when the first one is paid off.
Disadvantages of Mortgage
Let us discuss some disadvantages which are lesser in number than the advantages.
Paying more than borrowed
Mortgage loans are always accompanied with interests. Ultimately when you pay back, you pay the principal amount plus the interest. Some lenders charge a high interest rate compared to others. In situations where you urgently require a loan, you are forced to overlook this and will have to pay a lot of money as interest.
In addition to the principal amount and the interest to be paid back, there are other fees which seem unimportant in the beginning. These charges like legal fees, insurance fees etc will come upon you as extra burden when you actually start repaying.
Higher interests for variable rate mortgage
Unlike the fixed rate mortgage, the interest rate in variable rate mortgage changes periodically. Initially the rate may be lesser than that of the fixed rate mortgage. This largely attracts people to it. But at the end of the introductory period, the rate either goes up or down depending on the market interest rates. This means that the rates would be unpredictable and you may end up paying more interest
Affected by loss of property value
Any property will not retain the same value forever. It keeps on changing according to the market fluctuations. As a result, the rates in variable rate mortgages tend to increase. This may make people unable to pay the installments due to lack of funds and eventually lead to foreclosure.