What is a Mortgage Loan? Types, Benefits, and Challenges

The term “mortgage” refers to providing a kind of collateral or guarantee to the lender when seeking funds. As a kind of secured loan, mortgage loans constitute an agreement between the borrower and the lender, allowing the lender to keep the property until the payment of the loan amount plus interest. Many homeowners seek mortgage loans to source a sizable amount of money, ideal for various purposes. In India, these loans are primarily used to buy a home or borrow money against your existing property.

What is a Mortgage Loan?

Mortgage loan is a popular form of financing in India. It helps borrowers get a big loan amount at competitive mortgage loan interest. Individuals applying for such loans pledge their immovable assets, including residential and commercial properties, as collateral. The lender retains the right to keep the collateral property until you repay the loan amount and interest. 

Since mortgage loans are a kind of secured loan, they typically have lower interest rates as compared to other financing options available in the market. When you take out a mortgage, you agree to repay the loan amount and interest over a specified time limit, which typically varies from 15 to 30 years. In case of failure of loan repayment, the lender holds the right to foreclose the property.

Types of Mortgage Loans

1. Fixed-Rate Mortgage

One of the common mortgage loans in India, fixed-rate mortgage loans have constant interest rates throughout the loan lifecycle. The stability of interest rates helps borrowers budget their monthly loan payments effectively.

2. Adjustable Rate Mortgage

Under adjustable-rate mortgage loans, the interest rates may change after the initial fixed time limit. While the initial loan payments may look lower, the increased interest rates can lead to high future payments.

3. Interest Only Loans

A less common type of mortgage loan wherein the borrowers can pay only mortgage loan interest amounts without reducing the principal amount. After the specified phase, the interest only loan converts into regular payments. While these kinds of mortgages offer initial relief, in the long term, they can induce the consequences of higher future payments.

4. Reverse Mortgages

A unique financial product designed by lenders for homeowners aged equal to or above 62. Under such mortgage loan schemes, borrowers can convert part of the equity of their immovable property, for example home, into cash. The applicants receive the loan as lump sum, fixed monthly payments, or line of credit. The loan amount becomes due when the borrower dies, moves somewhere else permanently, or sells the home.

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Benefits of Mortgage Loan

There are several benefits of taking mortgage loans for individuals, such as:

1. You remain the legal owner of your immovable property. 

2. A mortgage is a secured loan which is approved quickly.

3. These loans have lower interest rates compared to other options.

4. In general cases, you can avail up to 60% of the property value of commercial property and up to 70% of the value of residential property.

5. The tenure of mortgage loans typically ranges up to 20 years, giving borrowers enough time to repay the loan money.

Risks of Mortgage Loan

While many individuals find these secured loans as a favorable option, they should also look at certain risks associated with mortgage loans:

1. Failure to payment of specified loan EMIs can lead to loss of your home.

2. This can put a significant financial burden, which can last over a decade.

3. Adjusted-rate mortgages can lead to rising payments if interest rates increase in the future.

Documents Asked When Applying for Mortgage Loan

There are certain kinds of documents, including identity, residential, and income proof, to submit to the lender when applying for a mortgage loan. Here is a list of common documents you might be submitting to complete the application process:

1. Identity Proof: Aadhaar Card, PAN, Voter’s ID, Passport, and Driving License

2. Resident Proof: Utility Bill, Driving License

3. Income Proof: ITR Receipt, Bank Statements, Salary Slip

4. Proof of Property Ownership: Sales Deed, Property Ownership Documents

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Things to Keep in Mind When Applying for Mortgage Loan

Here are some key pointers to keep in mind when applying for a mortgage loan:

1. Tenure

Since a mortgage loan is a secured loan, lenders can offer a longer repayment tenure of up to 20 years. However, the loan tenure can vary based on the applicant’s age, income, and other eligibility criteria.

2. Loan Amount

The second point to remember when taking a mortgage loan is that borrowers can avail sizable loan amounts depending upon the value of property pledged as collateral. Before offering a loan amount, the lender will conduct due diligence and estimate property value. Besides this, the applicant’s past payment history and credit scores are also considered.

3. Interest Rate

Mortgage loan interest rates remain typically lower compared to other financing options available. With secured loans, lenders bear lower monetary risk, helping them offer lower interest rates.

4. Eligibility Criteria

Lenders can facilitate borrowers with customized eligibility programs in order to provide them maximum loan amount against the pledged property. However, looking for quality customer service after loan approval when seeking such facilities. This is very important because if the loan application gets approved, the relationship may continue for up to 20 years.

5. Insurance

To safeguard the borrower and their family members against any unforeseen or unfortunate event, the lender should also be able to provide extra insurance cover. 

Conclusion

A mortgage loan can be a vital tool to avail big funds against owned property. Different types of mortgage loans are available from leading financial and banking service providers. However, it is equally important to understand the advantages and challenges of these financing options to qualify for adequate mortgage loans and convert the dream of owning a home into a great reality.

FAQs

1. What is the difference between a mortgage and a home loan?

Mortgage and home loans are often used interchangeably, but in real terms, they are different. For example, mortgage loans form a legal agreement between lenders and borrowers, wherein the borrower puts immovable property as collateral and gives the lender the right to keep the asset until the complete payment of the loan along with interest. On the other hand, a home loan, often regarded as a housing plan or property loan, is a financial product that is designed for individuals seeking funds to purchase a home or property.

2. What is the purpose of a mortgage loan?

The purpose of a mortgage loan is to purchase a home or utilize the value of existing property to borrow money. A mortgage loan is usually used to purchase a home or property.

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