An easy and efficient way to overcome financial limitations, a mortgage loan is a secured loan that helps you obtain funds by pledging a valuable asset as collateral. A mortgage loan is usually provided by the financial institutions against an immovable asset such as residential or commercial property. While a mortgage loan comprises numerous features such as greater loan amounts and flexible repayment structure along with minimal documentation, one must be aware of the process of calculating the EMI along with its inner workings to avoid any confusion in the future.
Scroll down to know in detail about a mortgage loan and the way it works.
Offered at affordable interest rates and prolonged repayment tenure, a mortgage loan can be primarily classified into the following two types:
- Home loans
When you apply for a mortgage loan to purchase a house, it is known as a home loan. Usually, the bank offers up to 80-90% of the property’s market value at flexible repayment terms.
- Loan against property (LAP) or home mortgage loans
When you mortgage your property to acquire substantial funds to deal with expected as well as unforeseen expenses, it is called a loan against property. Offered without any end-use obligations, the funds can be used for any legitimate purpose such as funding the education expenses, foreign travel, expanding your business, etc.
What are the features of a mortgage loan?
- High-loan amount – One can easily obtain a loan amount up to 90% of the market value of the property in a mortgage loan.
- Basic eligibility criteria – In a mortgage loan, the required eligibility conditions usually consist of the borrower’s age factor and source of income along with a keen emphasis on the credit history.
- Low-interest rates – Being a secured form of credit, the mortgage loan interest rates are much lower in comparison to other types of loans.
- Long tenure – You can opt for longer repayment tenure in a mortgage loan ranging between 20 to 30 years. The charged rate of interest usually depends upon the credit score of the borrower.
- Less paperwork – Packed with fast processing and instant approval feature, a mortgage loan involves minimum documentation and quick disbursal of the loan amount to the borrower’s account.
How does a mortgage loan work?
- While the property is kept as collateral by the lender until the mortgage loan is completely paid off through equated monthly installments (EMI), you are allowed to reside in the premises.
- However, if you fail to make timely EMIs payments in full, the lender could file a claim over your asset and reserves the right to liquidate it to recover the loan money.
- The EMI amount for a mortgage loan is computed based on amortization depending upon the loan amount, interest rate, and repayment tenure.
- While the EMI amount will remain constant over the loan tenure, there occurs a change in the portion of its components, interest, and principal amount. The interest part is greater than the principal amount in the EMIs submitted during the initial phase of the tenure. Gradually, the principal amount increases with time along with a decline in the interest component.