What Is A Mortgage In Simple Words And How Is It Better Than A Consumer Loan?

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Mortgage Loan

The word mortgage has become a magic word. The interest rate on secured loans in almost all real estate nowadays is not done without a mortgage. Let’s look at the fundamental difference between mortgages and other types of lending. Many people have probably wondered why you can’t just take out a consumer loan, buy an apartment, and pay for it the same way. Theoretically, this is possible. However, you need to understand the peculiarities of this type of credit. That’s why mortgages are a separate concept with a separate name because they include special conditions. The main condition is that the security under this mortgage is the same property on which the loan is executed. Another difference – the Buyer makes a down payment of 10% or even 20% of the original cost. It turns out that this property has already invested its own money in the borrower.

The Bank is naturally in favor of such a situation because if a person will not pay the loan, foreclosure is made on the property. And the borrower’s money is already pledged in it. That is, for the Bank, the property will be cheaper by the amount of the down payment and interest paid by that time. Accordingly, by selling such real estate even 10-20% cheaper than the market value, the Bank will still be able to repay his loan and get his money. The sale of the apartment at a price below market value is not a problem. Over time, the position of the Bank is only improving. The borrower has invested his own money in the property and does not want to lose it, and therefore will be more disciplined.

This Leads To Several Conclusions

It is profitable for the Bank to issue mortgages for a long time. Once it is executed, the Bank will not have to do anything with the loan for 10-30 years. Servicing does not take much time except to receive payments, which is now, in modern times, electronic systems are quite cheap. Accordingly, the Bank once made all the necessary actions, drawing up and issuing credit, and then for 30 years guaranteed income. Also, the Bank has a stronger guarantee on the loan and its payment and lower maintenance costs. So, under these conditions, it can LOWER the interest on this loan and still be a winner. That’s what we’re seeing. If you consider taking out a consumer loan, typically, its rate is at least twice that of any mortgage loan. There’s no such hard collateral and no such hard guarantees. The Bank has to monitor such a loan more closely, spending the energy and time of its employees. And so, such a loan is never comparable in cost to a mortgage. If you default on a consumer loan, the Bank will have to resort to the collateral measures laid out in the contract. Real estate is not always pledged as collateral in a consumer loan agreement. It often includes a guarantee, which still needs to be implemented, going to court, etc. All this is quite complicated.

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Himanshu Shah is the chief marketing officer at MyDecorative.Com, and he is also a young enthusiastic writer who is gumptious and talented. He has sound analytical and technical skills. He is a blogger, Digital Marketing Expert who likes to write on home decor.

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