499 Week 5 A/ For WIZARD KIM

Mortgage

A mortgage refers to a contractual relationship between a homeowner and a lender where the property will act as collateral until the lender is paid back in full. A mortgage plays a function of helping an individual to purchase a home or repair the home, cater for children’s fees or take care of health expenses (Krainer, 2013) A mortgage consists of various conditions for example to the borrower there is the interest rate and the amount of the principal.

Interest rate

An interest rate in a mortgage will show the annual cost that the lender should be paid on the mortgage loan. It is expressed as a percentage of the total loan amount and should be paid each month together with the principal payment until the loan is fully paid. The interest rates on mortgage loan determine the amount of money the borrower will be paying monthly and the period of time needed to settle the loan. It shows how low or high the amount of loan needed to be paid back is (Green, 2013).

The knowledge of interest rate is important to the borrower as it determines the long-term cost of buying the home when he/she seeks finance through borrowing. The borrowers always seek low-interest rates that they can afford and the lenders need to balance their interest rates. The advantage of the mortgage interest rate is that they do not change hence the same amount each month. This makes budget planning easy. The disadvantage, on the other hand, is that the interest rates make it slow on paying the principal hence not good to a homeowner who wants to sell the house in a period of about 10 year

Mortgage approval

Mortgage approval refers to the standard requirements that the borrowers must meet in order to qualify for the mortgage loan. When they meet the requirements, they are then given approval. Its importance is that it provides proof that the borrower can afford the home. The lender will check the income of the borrower by checking the bank statement, the investment accounts and debts before approving the loan application. The above details about the borrower determine the amount of loan the borrower is eligible. The above conditions are important to the lender (mostly a bank) as it provides information on whether the borrower should be given the loan without any risks of delayed or failed payment which always results into losses to the lender.

The mortgage approval is important to the borrower since it relieves one pressure while staying in their homes. This assures the sellers that the borrower qualifies to buy the home (Stobbe, 2015). The advantages of a mortgage approval are that it enables one to enjoy a faster closing period, enables the borrowers to spend time in the right homes since they are already qualified and enables the borrower to have confidence in their homes. The disadvantage is that the mortgage pre-qualification may give one a false sense of security if the lenders did not review the details of the borrower keenly.

References:

Gitman, J. L., Joehnk, D. M., & Billingsley, R., (2013). Personal Financial Planning.

Green, K. R., (2013). Introduction to Mortgages and Mortgage Backed Securities.

Stobbe, E., (2015). How to get Approved for the best Mortgage Without Sticking a Fork in Your Eye: A Comprehensive Guide for First Time Buyers and Home Buyers.

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