A mortgage is an agreement that allows a borrower to use a property as collateral to secure a loan.
In most cases, the term refers to a home loan: When you borrow to buy a house, you sign an agreement saying that your lender has the right to take action if you don’t make your required payments on the loan. Most importantly, the bank can take the property in foreclosure — forcing you to move out so they can sell the home.
The sales proceeds will be used to pay off any debt you still owe on the property.
A Mortgage Is an Agreement:
The terms “mortgage” and “home loan” are often used interchangeably. Technically, a mortgage is the agreement that makes your home loan possible — not the loan itself. For real estate transactions, agreements need to be in writing, and a mortgage is a document that (among other things) gives your lender the right to foreclose on your home.
Mortgages Make It Possible to Buy
Real estate is expensive. Most people don’t have enough cash in savings to buy a home, so they make a down payment of 20 per cent or so and borrow the rest. That still leaves the need for hundreds of thousands of naira in many markets. Banks are only willing to give you that much money when they have a way to reduce their risk.
Safer for banks: Banks protect themselves by requiring you to use the property you’re buying as collateral. To do so, you “pledge” the property as collateral, and that pledge is your “mortgage.” In the fine print of your agreement, the bank gets permission to put a lien on your home so that they can foreclose if needed.
More Affordable Loans:
Borrowers also get some benefit out of this arrangement. By helping the lender reduce risk, the borrower pays a lower interest rate. Mortgages are often used by consumers (individuals and families), but businesses and other organizations can also purchase property with a mortgage.
4 Ways to Save Money
Home loans are expensive, so saving even a little (in percentage terms) can lead to hundreds or thousands of nairas in savings.
1. Shop Around
Again, it’s essential to get at least three quotes from different lenders — preferably different types of lenders (a mortgage broker, an online lender, and your local credit union, for example). Everybody has different pricing, and you’ll learn a lot in the process.
2. Watch the Rate
The larger (and longer) your loan, the more your rate matters. You pay interest on your loan balance year after year, and those interest costs can be tens of thousands of nairas. Sometimes it makes sense to pay more up front — even buying “points” on your loan — if you can lock in a low rate for the long term.
3. Pay Attention to Mortgage Insurance
If you put down less than 20 per cent, you’ll most likely have to pay mortgage insurance. This insurance isn’t for your benefit — it protects the lender in case you stop making payments and they can’t recover their funds — so it’s best to avoid this expense. Evaluate alternative ways to come up with 20 per cent, and find out how to remove mortgage insurance as soon as possible. With some loans, like FHA loans, you can’t really get rid of that cost unless you refinance.
4. Manage Closing Costs
When you get a home loan, you’ll need to pay numerous expenses. There are application fees, credit check fees, origination fees, appraisal costs, and more. Some lenders charge higher and lower costs, but you always end up paying one way or another. Be wary of “no closing cost” loans unless you’re sure you’ll only be in the home for a short period.
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