Mortgages are a sort of loan that can be used to buy or keep up a house, land, or another piece of real estate. The property is collateral for the loan, and the borrower makes regular payments to the lender until the loan is fully repaid. The implication is that the lender has the right to seize the property if the borrower fails to make the agreed-upon payments.
Applying for a mortgage requires a borrower to ensure they meet some standards, including minimum credit ratings and down payments. You also need to be in the know of how the financial market operates.
Banks and other financial institutions typically offer mortgages, and the loan terms, such as the interest rate and repayment period, are negotiated between the borrower and the lender. Mortgages also play a significant role in the housing market, enabling many people to purchase real estate assets that they might not be able to afford otherwise.
How Do Mortgages Work?
The property acts as collateral for the loan, which is paid back over a set period of time, typically 15 to 30 years. The monthly payments consist of the principal amount borrowed and the interest charged on the loan.
The interest rate, loan term, and down payment amount all determine the mortgage’s overall cost. The borrower must have a good credit score, sufficient income, and a financial obligation to secure a mortgage. Failure to make payments can result in property loss through foreclosure.
Instead of paying the entire purchase price upfront, individuals and businesses use mortgage loans to fund the purchase of real estate, which is a fair market.
Features of Mortgage Loan
Mortgage loans come with several features that differentiate them from other types of loans. Here are some of the key features of a mortgage loan:
Property Transfer
The purpose of transferring a property interest must be to guarantee repayment of a debt or the fulfillment of a legal obligation to pay money.
A property transfer made for a reason other than those mentioned above will not count as the mortgage. For instance, a house sold to pay off debt from the past won’t count as a mortgage.
Secured Property
To be eligible for mortgage financing, it must be a secured property that can be identified by its size, location, boundaries, etc..
Repayment
On loan repayment with interest due, the interest in the mortgaged property is transferred back to the mortgage.
Eligibility
Only an immovable property can be eligible for a mortgage. The benefits resulting from investment properties connected to the earth, such as buildings and machinery, are included in the immovable property. However, a machine that may be moved from one location to another and is not anchored to the ground is not regarded as immovable property.
Rights
The mortgagee has the right to use the sale proceeds of the mortgaged property to recoup the debt if the mortgagor defaults on the loan.
Interest
In contrast to a sale, which transfers ownership of the property, a mortgage transfers an interest in a particular immovable property.
By giving the mortgagee an interest in the property, the owner gives up some of his ownership rights while keeping the remainder for himself. For instance, a mortgagor is still entitled to redeem the mortgaged property.
Collateral
Providing the mortgagee with physical possession of the collateral is not always necessary.
Mortgage Note
The mortgage note is a legal document outlining the loan terms used to purchase real estate. It states the amount of money borrowed, the interest rate, and the length of time for repayment
Mortgage Loan Process
According to the definition of a mortgage, the lender and the guarantor are the two parties to an agreement. They must concur on the terms of the agreement on the mortgage basics and provide proof of everything before proceeding with the closing to avoid mortgage stress.
The mortgage procedure is as follows:
Determine Your Budget
Figure out how much you can afford to borrow and your monthly mortgage payment. Also, find out the interest associated with the original loan.
Shop for a Lender
Compare mortgage rates and terms from several lenders, including banks, credit unions, and online lenders.
Pre-approval
Submit a loan application to the lender to get pre-approved for a mortgage.
Find a Property
Once you are pre-approved, start searching for a property within your budget.
Make an Offer
When you find a property you like, make an offer and provide a deposit to show your commitment.
Get a home appraisal
The lender will arrange for an appraisal to determine the property’s value.
Final loan approval
If the appraisal is acceptable, the lender will approve your mortgage.
Close the Loan
Sign the loan documents and pay any closing costs. The lender will then disburse the loan funds to the seller.
Start Making Payments
You will begin making monthly mortgage payments to the lender to repay the loan.
If the request is approved, the granter will provide the borrower with a loan with a predetermined amount and fixed interest rate.
Having a loan may provide prospective homebuyers an advantage in purchasing a residential property because sellers will know they are serious buyers in a competitive pre-approval market.
Types of Mortgage
Mortgages typically come with interest rates, fees, and repayment terms agreed upon between the lender and borrower. There are several types of mortgages, including:
Reverse Mortgage
In this type of loan, the lender makes a monthly loan to the borrower. The lender divides the loan amount into installments and provides the borrower with those payments.
Common Loan
A common mortgage is a loan used to purchase or refinance a property. Borrowers use the property as collateral and make monthly payments over a set term, usually, 15-year mortgage loans or 30 years, to repay the debt.
The secured loan is usually by a mortgage lien on the property, which gives the lender the right to foreclose if the borrower fails to make the required payments.
Equitable Mortgage
With this kind of mortgage, the lender receives the property’s title deeds. This is a typical occurrence with mortgage loans in banking. It is done to protect the building.
Buydown Mortgage
A buydown mortgage is where the interest rate is temporarily reduced through payments made by the lender, the builder, or a third party, known as buydown funds.
The reduced rate lasts a shorter period, after which the interest rate gradually increases over the remaining mortgage term.
Simple Mortgage
In this form of mortgage, the borrower must sign a document declaring that, if they are unable to repay the loan in the allotted time frame, the lender may sell the property to anyone to recover their investment.
Fixed-Rate Mortgage
Typically, this mortgage loan has fixed interest rates and payments throughout the term. The payment remains constant regardless of the market conditions or underlying economic activity. These loans typically have terms ranging from 10-30 years.
It means that the monthly mortgage payment remains the same for the life of the loan, making budgeting and financial planning easier for the borrower.
Mortgage by Conditional Sale
This is an aspect of mortgage lending in which the lender may impose several requirements on the borrower’s ability to repay the debt.
These terms could include the sale of the property if the monthly payments are late, a rise in interest rates due to the late payments, etc.
Adjustable-Rate mortgages
Adjustable Rate Mortgages (ARMs) are a type of home loan where the interest rate can change (adjust) over time.
The initial interest rate is typically lower than fixed-rate mortgages but can increase or decrease based on changes in a financial index.
Usufructuary Mortgage
The lender gains from this type of mortgage. For the loan term, the lender has control over the property and may rent it out or utilize it for other purposes until the loan balance is repaid. However, the owner of the real property has the primary rights.
Investment-Backed Mortgage
An investment-backed mortgage is a mortgage loan in which the loan is secured by an investment, such as a stocks and bonds portfolio, instead of the property being purchased.
Conventional Mortgage
A conventional loan is given to purchase a home or other real estate property. It is typically offered by a bank, credit union, or other lending institution and is not backed by the government; it may require extra payment.
This type of loan generally has stricter eligibility requirements than other types, such as FMBN mortgages.
Jumbo mortgage
Jumbo mortgages are used to finance high-value homes, typically those with a purchase price that exceeds the conforming loan limit.
Because they represent a greater risk to lenders, jumbo mortgages usually have higher interest rates and stricter underwriting requirements than conforming mortgages.
Commercial Mortgage
Commercial mortgages are loans designed to finance the purchase of commercial real estate and commercial properties such as warehouses, office buildings, retail spaces, and other businesses.
Who Provides Mortgage Loans?
Mortgage loans are typically provided by financial institutions such as banks, credit unions, savings and loan associations, and mortgage companies.
Mortgage lending divisions are also available at life insurance companies, pension funds, and other significant asset management companies.
Some government agencies, such as the Federal Mortgage Bank of Nigeria (FMBN) provide mortgage financing.
Other private investors (individual and institutional) have also provided mortgages, and these parties have combined their funds into different mortgage trusts to form private lending organizations.
Mortgage brokerage firms frequently distribute these monies to homebuyers and real estate investors.
A mortgage broker is not a direct lender or mortgage industry. They help borrowers find suitable mortgage loans from various lenders and assist in loan applications.
The broker may charge a fee for their services, which the borrower or the lender can pay, or a combination of both. The broker’s role is to find the best mortgage loan option for the borrower based on their financial situation and loan requirements.
Mortgage Payments
Principal, interest, taxes, and insurance, also known as PITI, make up the four common types of mortgage payment. The money may also cover additional expenses.
The borrower’s risk and the nature of the borrowing request also impact interest rates, which vary depending on the jurisdiction and other market factors such as current market rates, debt market conditions, etc.
In general, interest rates are either fixed, average, or variable interest rates (often called floating).
Principal
The principal is borrowed from a mortgage lender to purchase a home. The principal component of each payment is used to reduce the balance of the original mortgage.
On the final payment of the amortization period, which could be between 25 and 30 years, the original amount owed is often planned to be paid in full.
Interest
When someone borrows money, the lender will impose an interest rate, a percentage of the borrowed amount, which will be charged for the privilege of using the borrowed funds. Put another way; interest is the yearly cost of borrowing the principal.
Each month, interest is accumulated, and your monthly payment will pay off all of that interest. In addition to interest, securing a mortgage also involves paying points and other closing costs.
Property Tax
The home’s property taxes are normally paid to your lender along with your monthly mortgage payment. The money is often kept in an escrow account, and when the time comes, the lender will utilize it to pay your property taxes.
Due to the lengthy amortization durations of mortgage loans, a large share of the payment amount early in the amortization period often consists of interest, with the ratio changing to the opposite as time passes.
Homeowners Insurance
When a disaster, fire, or other accident affects your property, homeowners insurance offers you and your lender some protection.
The insurance premium payments are included in your monthly mortgage payment and collected by your lender, who then holds the funds in escrow and pays the insurance company on your behalf when the time comes.
Mortgage Insurance
Mortgage insurance is a type of insurance that protects the lender if the borrower defaults on their mortgage payments. It is typically required for homebuyers with a down payment of less than 20% of the home’s purchase price.
How to Be Mortgage-Eligible
Here are some suggestions to increase your chances of meeting the requirements and receiving mortgage approval:
Become informed before applying for a loan: ensuring you understand what you’re getting into is important.
Research the cost of property taxes and the best mortgage program for your circumstances; research the capital market, current market prices, interest rates, the financial market, credit risk, and any first-time homebuyer assistance available.
Create a credit history and work to keep or raise your score: Before submitting an application for a mortgage, try to pay all your credit card, loan, and other debts on schedule and verify your credit reports for any mistakes.
To have inaccurate information changed, you should notify the credit reporting bureau as soon as you discover any error. Likewise, refrain from getting new credit cards and making significant expenditures (like a car).
The level of risk involved with a mortgage is significant, and the financial implications of taking one on should not be underestimated. There should exist a credit check from both parties
- The borrower must understand that if they fail to make timely mortgage payments, the lender has the right to possess the mortgaged property.
- It is also important to remember that if the mortgage loan is subject to an adjustable interest rate, the payments could become unaffordable over time.
Therefore it is essential to read through all available information regarding mortgage fees, rates, and repayment terms before signing any documents.
Additionally, it is a wise idea to speak with a professional financial advisor who can provide expert advice on how best to approach taking out a mortgage loan
Important Mortgage Terminologies to Understand
Here are some fundamental terms you may run upon while you evaluate your mortgage options:
APR
APR represents how much it will cost you to borrow money for a mortgage. The APR, a more comprehensive measurement than the interest rate alone, considers the interest rate, discount points, and other loan-related costs.
Underwriting Process
The process through which a bank or mortgage lender evaluates the risk they would be incurring by lending to a certain borrower is known as mortgage underwriting.
The underwriting procedure necessitates an application and considers factors such as the borrower’s income, debt, the price of the property they wish to purchase, and their credit record and score.
Amortization Period
Amortization describes repaying a loan, such as a mortgage, over time through installment payments. Each payment is split into two parts: the main, or the amount borrowed, and the interest.
Private Mortgage Insurance
When your loan-to-value (LTV) ratio is more than 80%, the lender may purchase private mortgage insurance (PMI), which is normally paid for by you, the borrower (meaning you put down less than 20% as a down payment). PMI pays a portion of the difference between the price the lender can get for your home after a foreclosure if you default and the lender needs to sell it.
Initial Payment
The portion of the home’s purchase price that a buyer pays upfront is the down payment.
Buyers often make a down payment equal to a portion of the home’s worth, then borrow the remaining amount through a mortgage.
A borrower’s chances of receiving a lower interest rate might be increased by making a greater down payment. There are several minimum down payments for various types of mortgages.
Mortgages Servicer
Your mortgage statements and other regular responsibilities associated with managing your loan after it closes are handled by a mortgage servicer.
For instance, if you have an escrow account, the servicer will ensure your taxes and insurance are paid on time and collect your payments.
Non-Conforming
A “non-conforming” mortgage, in contrast to a conforming loan, does not meet the criteria necessary for the Federal Mortgage Bank of Nigeria to buy it. A jumbo loan is one type of non-conforming loan.
Borrower Defaults
Borrower default is a situation that occurs when a borrower is unable to make the full repayment of their loan on time.
Escrow
The sum of a borrower’s monthly mortgage payment that goes toward homeowners insurance and property taxes is kept in an escrow account.
The earnest money a buyer deposits between the time their offer is accepted and the closing is likewise kept in escrow accounts.
Promissory Note
A promissory note is a legal document that requires a borrower to pay back a specific amount of money over a specific period of time and according to specific conditions. The note includes a list of these specifics.
Banks that Offers Mortgage Services in Nigeria
Here are some of the financial institutions(banks) in Nigeria that offer mortgage services:
- First Bank of Nigeria: United Bank for Africa (UBA)
- Access Bank: Diamond Bank
- Fidelity Bank
- Guaranty Trust Bank (GTB)
- Ecobank Nigeria
- Zenith Bank
- Sterling Bank
- Union Bank of Nigeria
It is important to note that the availability and terms of mortgage services may vary depending on the bank and can change over time.
Frequently Asked Questions (FAQs)
What is a Mortgage Insurance Premium?
A mortgage insurance premium (MIP) is a type of insurance that borrowers must pay if they have a loan with a down payment of less than 20%. MIP protects the lender in case the borrower defaults on the loan.
How Does an Interest-Only Mortgage Work?
An interest-only mortgage is a type of loan where the borrower pays only the interest on the mortgage for a set period, usually 5-10 years. After that period, the borrower must start paying the principal and interest. Interest-only mortgages can be risky because the borrower does not build equity in the property during the interest-only period.
What are Mortgage-Backed Securities?
Mortgage-backed securities (MBS) are investment products created by packaging a group of mortgages. The MBS are then sold to investors, who receive regular payments based on the interest and principal payments made by the borrowers on the underlying mortgages.
What is Rate Risk in Mortgages?
Rate risk refers to the risk that interest rates will change, causing the value of a mortgage or other debt instrument to change. For example, if interest rates rise, the value of a fixed-rate mortgage will decrease because the interest rate on the mortgage is lower than the current market rate.
Can I Deduct Real Estate Taxes on My Mortgage?
Individual taxpayers can deduct real estate taxes paid on their primary residence and a second home from their federal income taxes. However, real estate taxes on investment properties are not deductible.
Conclusion
Suppose you plan to buy a home soon. In that case, you should brush up on your mortgage knowledge and consider the mortgage loan insurance premium, be vigilant when hiring the service of a real estate agent, understand the domestic market, and know the amortization schedule and amortization calculator.
Learn about mortgages, what to look for while searching for a mortgage, and what you can do with your mortgage once you’ve purchased a home. We wish you the best!
