Arguably the biggest debt that most people incur over the course of their financial lives is a home mortgage loan.
As the name suggests, a home mortgage loan is a loan you get from a lender for the purpose of buying a property or, in some cases, refinancing that property so that you can borrow against your equity.
If you are new to homeownership (see also: investing in real estate), then getting familiar with the differences between mortgage loans and traditional, direct loans is important (why else would you have come to this page if it were not?)
Mortgage Loan or Direct Loan? What’s the Difference?
Unlike a direct loan, a home mortgage will have a longer amortization period. This is simply the length of time it will take to repay the debt, often 25 or 30 years.
This is not to be confused with the mortgage or loan term, which is the amount of time your interest and/or repayment terms stay fixed.
For example, it could take you 25 years to repay your mortgage, but you may have to renew those terms after five years.
At the time of renewal, the rates and payments will likely have changed, meaning a payment reset is possible if you want to pay the mortgage off in full by the end of the amortization period.
Similar to a direct loan, a mortgage will take security or collateral in order to approve the mortgage loan. That security is the real estate property itself (normally the house and the land on which it sits).
Are Mortgages Considered Good Debt?
A home mortgage loan is generally seen as healthy debt because it involves borrowing in order to give your net worth a bit of a boost.
As you repay the mortgage loan, even though much of the payment gets swallowed up in interest costs (especially at first) the value of the property is expected to increase over the long term. This builds equity.
A common illustration is a $200,000 house with a $190,000 mortgage.
Over 10 years, that house value will increase to roughly $268,000 assuming a 3% property appreciation rate, while that mortgage will have been paid down to $148,000 assuming a 25-year amortization and a 10-year mortgage term at a rate of 6.5%.
Since the monthly payments of a little more than $1,270 are being paid to the mortgage instead of a landlord, you build equity through the reduction of principal in the mortgage loan as well as the appreciation in value to the property.
It makes the argument (rent vs. own) a compelling one in favor of taking out a mortgage and buying property.
Where To Get a Home Mortgage Loan?
Shopping for a home mortgage loan can be a challenge. Since most brokers and lenders are paid a commission or some kind of performance incentive, the challenge is one of signing up with the right lender or broker.
Ideally, you want more than just a great rate; you want a mortgage that will help you continue to enjoy your lifestyle while offering as much flexibility as possible. That is a tough balancing act because lenders will typically give you less flexibility in exchange for a better rate.
Starting online or with a recommendation from a friend or family member is usually the best bet.
But make sure you fully understand the terms (e.g. how long before I renew?) and conditions (e.g. what if I want to prepay part or all of my mortgage sooner than the term end-date? what if I sell my house and move?) of the home mortgage loan before you sign the contract.
Often, a mistake cannot be fixed without incurring some pretty hefty interest penalties.
This article gives you a very basic understanding of what a home mortgage loan is all about. As you can see, it operates quite similarly to a direct loan for a vehicle.