Understanding Real Estate Loans

Real estate loan (also known as mortgage) is the money that you borrow from someone (a financial institution i.e. a mortgage lender) for the purpose of buying a property. The real estate loan generally covers a part of your purchase price and the remaining portion has to be paid by you upfront i.e. as down payment. The amount (i.e. the percentage of total purchase price) that you have to pay as down payment is dependent on a number of factors and you can generally reduce it to even 5% by going for mortgage insurance. FHA and VA loans (i.e. mortgage insurances through FHA and VA) reduce the down payment requirement on the home loan even further. Whatever you borrow from the mortgage lender, of course, needs to be paid back to the mortgage lender over a period of time (and you will also need to pay appropriate interest associated with the loan agreement.)

The tenure of your real estate loan and the prevailing market rate will determine the amount of interest you pay. Generally, you are required to pay back the real estate loan in the form of monthly installments, which are composed of both interest and principal portions. Also, there are various types of real estate loans e.g. fixed interest rate loans and adjustable interest rate loans. So depending on what type of loan you have applied for, your monthly payments might either remain constant (fixed rate) for the full tenure of the loan or keep getting adjusted periodically (adjustable rate) on the basis of a financial index. Besides that, some other costs that are also associated with real estate loans include; closing costs, inspection costs, attorney fee etc. Also, in case the property needs some repairs, there will be costs associated with that too. Again, there is stamp duty and other taxes that you need to pay. So, really, you need to understand the concept of real estate loans and the related costs clearly before you actually go to a lender and apply. And understanding these concepts is really not that tough.

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