Owning a home has always been part of the American Dream. During the 2008 Housing Market Crash, however, many homeowners found themselves in underwater mortgages as the cycle moved against them. In consequence, they could not make their monthly mortgage payments and had to return their hard-won homes to the original lenders, often dropping their keys off at the bank.
Because this could be the biggest investment of the average middle-class American’s life, one should understand all particulars regarding real estate, mortgages, and finances. Therefore, we should answer the question,
Mortgage Defined
Merriam-Webster defines a mortgage as “a conveyance of or lien against property (as for securing a loan) that becomes void upon payment or performance according to stipulated terms.” What, however, does that mean?
In simple terms, a mortgage is a contract between a borrower and a lender regarding the purchase of some real estate property. Once the mortgage loan is paid in full, the contract is over. Therefore, it does not literally mean “unto death” as it translates in French from its original etymology.
If the borrower uses a mortgage to purchase a house, there is usually a down payment, although “no money down” real estate markets have existed in the past. From that point on, the borrower must pay the lender monthly payments for the life of the loan. The unpaid balance will be lent at varying interest rates, aka mortgage rates, the size of the interest often depending on the size of the down payment, inversely. Should the borrower fail to make the monthly payments on the home loan, the down payment serves as collateral to be lost upon breach of the contract. Depending on the terms of the home loan, there may also be additional collateral involved.
An adjustable-rate mortgage, variable rate mortgage, or tracker mortgage has a rate that fluctuates with credit markets. Adjustable-rate mortgages usually have lower rates at the beginning of the life of the loan, so it makes it easier for prospective homeowners to qualify for a home loan.
Insuring Your Mortgage and Whatever Else
Depending on the type of mortgage and the loan amount you have, you might be eligible for mortgage insurance. What is mortgage insurance?
Mortgage insurance is really for the benefit of the lender, rather than you. It is an insurance policy that protects the lender should you default on the home loan. It can serve you, however, in making you a more desirable candidate for receiving a loan you might not otherwise get. This can be especially useful if there is an issue with your credit score.
Mortgage insurance is typically only used for home loans in which the borrower is making a down payment of 20 percent or less. Mortgage insurance policies can either be private mortgage insurance policies or public mortgage insurance policies.
Homeowners insurance is also a good idea if you plan on taking out an expensive mortgage on your home. Practically any home that you live in is probably a long-term investment, and the amount of coverage you have should reflect that, especially if your home has a high cash value.
Because home buyers are often family people, some type of life insurance coverage should also be considered. Due to the fact that your dependents will have to pay property taxes in addition to mortgage payments if they wish to keep the home, the beneficiaries of your life insurance policy should have the right amount of coverage.
Unlike adjustable-rate mortgages, term life insurance quotes are at a fixed rate. How much life insurance the homeowner wishes to purchase depends a great deal on the amount of money invested in the home and home loan for the reasons stated above. The financial capabilities of the beneficiaries should also be inversely related to the financial obligations of the life insurance policy owner.
