What is Mortgage?
Most people understand a mortgage to be a home loan. The technical definition, however, is a bit more complex. A mortgage is actually a loan in which you, as the borrower, offer your property and land (the title) as security until such time as the loan (principle plus interest) is repaid, say 10, 15 or 25 years down the line.
The property and land you offer as security is actually what you're buying. Once repaid, the title of the property is returned back to the borrower. The word comes from the French meaning 'dead pledge'.
The property and land you offer as security is actually what you're buying. Once repaid, the title of the property is returned back to the borrower. The word comes from the French meaning 'dead pledge'.
Four Basic Components of Mortgage Calculations
Mortgage calculations always involve four basic variables, namely Principle, Interest, Term, and Repayment:
1. Principle: Amount of money borrowed.
2. Interest: Money a borrower pays for use of money (principle) or money a lender earns for lending the money.
3. Term: Life of a mortgage contract. A the end of this period, the contract is over and the amount of the remaining principle becomes due in full.
4. Repayment: Regular payments to be repaid at preset intervals, such as weekly, bi-weekly, monthly, and etc. Monthly interval is most commonly used. Amount of repayment is calculated based on the principle amount, interest rate, and term given to pay off the entire principle. Every repayment is made up of two portions: principle and interest. The principle portion reduces the original amount borrowed. Whereas the interest portion is the money a borrower pays for use of money.
When a mortgage is set up, four basic components above will determine how much total interest a borrower has to pay. The shorter the term given to pay off the principle, the less the interest the borrower has to pay. However, the shorter the term is, the higher the repayment amount is required.
The length of time used to determine repayment amount is called Amortization Period. The period can vary from 10, 15, to maximum 30 years (some banks in Malaysia starts to offer up to 40 years term). If a borrower is given a 30-year term and every repayment is made in time without extra prepayment, he/she will completely pay off the mortgage after 360 payments.
Each payment consists of principle and interest. At the early stage of the amortization period, money from each repayment made mostly goes towards interest, very little goes towards reducing principle (see amortization schedule 1). Over time, the trend reverses whereby money from each repayment made mostly goes towards reducing principle, very little goes towards interest (see amortization schedule 2).
When a mortgage is set up, four basic components above will determine how much total interest a borrower has to pay. The shorter the term given to pay off the principle, the less the interest the borrower has to pay. However, the shorter the term is, the higher the repayment amount is required.
The length of time used to determine repayment amount is called Amortization Period. The period can vary from 10, 15, to maximum 30 years (some banks in Malaysia starts to offer up to 40 years term). If a borrower is given a 30-year term and every repayment is made in time without extra prepayment, he/she will completely pay off the mortgage after 360 payments.
Each payment consists of principle and interest. At the early stage of the amortization period, money from each repayment made mostly goes towards interest, very little goes towards reducing principle (see amortization schedule 1). Over time, the trend reverses whereby money from each repayment made mostly goes towards reducing principle, very little goes towards interest (see amortization schedule 2).
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