Sunday, October 25

Advantages and Disadvantages of Mortgage

Buying your own home is a dream that most adults dream of. The reason for this is because owning a house or a property has become a near impossibility with the real estate prices sky-rocketing. Now, thinking about a new house translates to thinking about getting a mortgage. So let us see what are the advantages and disadvantages of a mortgage.

What is a Mortgage?

In pure dictionary meaning, a mortgage is an agreement that allows an individual to borrow money from a bank or similar organization, especially to buy a house or the amount of money itself. It is 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. The loan is repaid along with interest and other costs. The contract subsequently ends once the loan is repaid. But if the loan is not repaid, the bank or lender has the right to sell the property to cover the debts. This process is known as foreclosure which negatively affects your scope of taking loans in the future. 

There are different types of mortgages. Firstly, there are fixed-rate mortgages where the borrower pays the same rate of interest for the whole period of the loan. Secondly, there is the adjustable-rate mortgage where the interest rate is fixed for the initial period. It then fluctuates to market interest rates accordingly. There are other kinds like interest-only mortgages and payment-option adjustable-rate mortgages. This deals with complex repayment schedules for the experienced borrowers. Hence, homebuyers must consult with a mortgage expert before making their investments to avoid any mistakes.

Know More – Top 10 Pros and Cons of Buying a House

Advantages and Disadvantages of Mortgage

Advantages of Mortgage

Buying capacity

The cost of property has increased like anything in the last couple of years. With a lesser hike in people’s salaries, it is impossible to think of buying land or house. That is where mortgage comes to help. So a mortgage loan definitely helps increase the buying capacity of people

Cost-effective

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.

 Tax benefits

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 by 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.

Extra charges

In addition to the principal amount and the interest to be paid back, there are other fees that seem unimportant in the beginning. These charges like legal fees, insurance fees, etc will come upon you as an extra burden when you actually start repaying.

Advantages and Disadvantages of Mortgage

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 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.

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Pros and Cons

PROS

CONS

Buying capacity

Paying more than borrowed

Cost-effective

Extra charges

Easy to repay

Higher interests for variable rate mortgage

Better credit score

Affected by loss of property value

Tax benefits

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