Welcome to professrsavings.com, we teach finance basics. Today we will teach you about mortgage.
Hi I’m Rayfil Wong. We hope these investment concepts will help you be a better investor.
Keeping it simple.
A mortgage is a loan used to purchase a home where the property serves as the borrower’s collateral.
Let’s look at Professors Savings.
He wants to buy a new house worth $500,000.
The problem is Professor Savings has only $100,000 in cash. or 20% of the home’s value.
Professor Savings goes to a local lender, Unicorn Bank, to apply for a 30-year mortgage that will cover the remaining 80%.
So Professor Savings agrees to make monthly payments to the bank that will cover part of the original loan amount.
That is the principal as well as interest.
The prospective home buyer can decide whether to get an adjustable-rate mortgage where the interest payments could change over the course of the loan or a fixed-rate loan.
If Professor Savings wants the predictability of his steady monthly payment especially since he has to pay for tuition for Professor Savings Jr. and Baby Savings needs money for diapers, he will pick a fixed-rate loan.
Before lending $400,000 the bank needs to be confident that Professor Savings, as a company, can pay it back.
Lenders always have some protection in a form of a lien placed on the property.
Lien is the right for the bank to keep Professor Savings’s house if he fails to make his payments.
Let’s say Professor Savings is not able to and fail to make his monthly payments, the bank can remove him from the house and resell it to another buyer, a process known are foreclosure.
However foreclosures can cause a bank considerable time and expense.
So as an extra precaution, the bank’s underwriting department takes a close look at Professor Saving’s finances before deciding to extend the loan.
As with most banks and specialized mortgage lenders, they look at his income, credit history and assets.