Real estate properties are seldom bought on spot cash. The vast majority are purchased with a little down payment and mortgage loans on the balance.
A mortgage loan is a form of secured financing; that is, the lender gives you the needed financing and in return you pledge the property as collateral.
In a mortgage loan, there are two very important documents that you will be committed to:
- Note – is a promise to repay the loan on a timely basis
- Mortgage or Deed of Trust – is a pledge to secure the loan with the real estate in question in case the borrower fails on his loan obligations.
A mortgage creates a lien on the property, which gives the lender the right to foreclose the property in question.
A loan default happens when you fail to repay the loan “on time” as stipulated on the contract. If that happens, the lender can foreclose the mortgage and take on the property.
Interest Rate and Loan Term
A mortgage loan has two very important components that you need to be aware of.
- Interest rate – is the price of using the lender’s money and is applied to the principal balance. A lower interest rate means a cheaper use of the lender’s money and should be good for you.
- Loan term – the time it takes to pay off the whole amount borrowed. Loan term usually spans a number of years.
These two factors primarily affect the installment payments, which is usually on a monthly basis.
The amount shown on the monthly installment schedule always remains constant. When you pay off a loan, a portion goes to the interest payment and another portion goes to pay off the principal amount. In other words, the principal balance is reduced with each payment that you make. And as a consequence, the interest is also reduced as the loan matures. Early installments mostly go to the interest payments while later installments mostly cover the principal.
Down Payment and Mortgage
Most lenders will not grant you a loan that is equivalent to the selling price of the property. In many cases, they will have to appraise the property and you will be asked to put a down payment and loan the remaining balance of the appraised value.
The down payment is sometimes referred to as equity on the property.
The standard down payment is 20% of the appraised value of the property; 80% being your loan or the financed amount.
The more money you put as down payment, the lower your loan will be. And always remember that the loan bears an interest.
Now comes the question: Which is better of the two?
- A low down payment and large loan.
- A large down payment and small loan.
There are arguments favoring one over the other. It’s all up to you and your circumstances. But sometimes, the lender will force you to take on lower loan (with large down payment) to lower their risk of loaning you the money to finance your real estate purchase. That’s just pure business.
Pag-IBIG Mortgage Loan
Depending on the property and where you are buying it, Pag-IBIG Fund may give you a large amount of loan which is almost equal to the selling price of the property. But always bear in mind the maximum loan amount the Pag-IBIG Fund can grant you. If you find the amount too small for the property you are considering, you may need to come up with a large down payment or you may use an alternative financial institution.
Mortgage Loan Fundamentals is written by Carlos Velasco.