Definition of Mortgage
Most property transactions are partially financed by a loan. Home loan, or mortgage is defined as:
A loan in which the borrower puts up the title to real estate as security (collateral) for a loan. If the borrower doesn't pay back the debt on time, the lender can foreclose on the real estate and have it sold to pay off the loan.
This is simply means that you are securing the loan against your home. Failure to make repayments on the loan could therefore result in you losing your home. In order to avoid this you should ensure that you can comfortably afford the repayments on the loan before you make any commitment.
Basic Components of Mortgage
Loan amount - this is the amount that you wish to loan. It can be typically up to 80 or 90% of the property purchase value.
Interest rate - this is how much interest you will have to pay every annually to the lender for the loan. Interest rate can be fixed rate, flexible rate, or combination of both over the duration of the loan.
Loan term - this is the duration over the loan is planned to be repaid. Typically this can be up to 30 years.
The home loan is typically repaid to the lender monthly. The repayment is combination of principal repayment and interest payment. Using these three parameters, you can calculate your monthly mortgage payment.
Uses of Mortgage
People typically take mortgages to buy a new property or to refinance their existing property. The property can also be for investment or for own use (called principal residence).
Refinancing typically happens because most banks offer initial discount rates which turn higher after the initial lock-in period expires. People then refinance to get the lower rates again. Refinancing also allows in some cases to increase the loan amount to keep as little as possible money tied to the property. For example, currently the loan rates are lower than inflation rates in Singapore, so having more loan is actually beneficial to the borrower. Mortgage is also usually the cheapest financing available for people (e.g. compared to personal loans).
