The mortgage loan, although not a new product, still remains poorly known and not very popular. Some Polish clients have not heard of it at all, and others mistake it for a mortgage. In practice, however, it is one of the more cost-effective ways to borrow a large amount of funds for free use.
Mortgage loan – basic information
At the outset, let’s explain that to be able to take out a mortgage, you need to have a mortgage-free property. In the case of such a product, unlike in the case of a mortgage, the collateral is for the bank not acquired but already owned real estate. The latter can be, for example, a house, apartment or building plot.
The most important thing is that the lender can easily sell it and get the money back if needed. Importantly, the property can be your property or belong to a family member or other person who agrees to be mortgaged. Why would you be interested in such a solution? What is a mortgage? What are its pros and cons? When can it be profitable for you?
Mortgage loan versus mortgage and cash loans
A mortgage, just like a cash loan, allows you to borrow money for any purpose you don’t even need to inform the bank about. However, it involves the need to provide security in the form of real estate. It is the latter that makes the term “mortgage” appear in the name of the loan.
What is the interest rate associated with each product?
In terms of interest rate and APRC, a mortgage loan is more favorable than a cash loan, but less favorable than a mortgage. This is due to the fact that the bank gains valuable collateral and good protection of its interests. However, on the other hand, there is no control over how the funds are used. With a mortgage he is willing to offer even better conditions, because in this case he knows exactly how much and for what you will spend money.
How much and for how long can you borrow?
Under the mortgage, you can borrow from tens of thousands to several million dollars. In practice, the amount of funding is not more than 80 or 90 percent. (with low own contribution insurance) of the value of acquired property. The loan period can be from a few to even 35 years. In the case of cash loans, depending on the offer, the maximum loan amount is usually USD 150,000 or 200,000, and the longest possible loan period is 8 or 12 years.
Both in terms of the maximum amount and the maximum funding period, the mortgage is between the mortgage and the cash loan. Thanks to it you can borrow up to 80 percent. property value for a period not exceeding 25 years.
Most banks, however, will offer less favorable terms – 15 or 20-year repayment time and financing at 50, 60 or 70 percent. In fact, the parameters of the loan depend not only on the details of the offer and the value of the property, but also on the creditworthiness. If your financial standing is good enough and you have a flat worth USD 300,000, you will get a loan for over USD 200,000.
Mortgage loan – how to get it?
Currently, every second commercial bank operating offers the possibility of using a mortgage loan. Regardless of which one you choose, you can expect a similar course of loan procedures and documentation requirements. By the way, they are also very similar to those found in the case of a mortgage.
When applying for a mortgage, you must first complete and submit a funding application to the selected bank. You are required to provide an ID document as well as a certificate confirming the source and amount of earnings and documents related to the property. The long list of the latter includes, among others: the deed of ownership, current property valuation and a certificate of no debt.
Based on such documentation, analysts will calculate your creditworthiness and assess whether the property can be accepted as collateral for the loan. Within 2-3 weeks of submitting the application, you will receive a financing decision. It will be accompanied by a loan agreement with the final repayment terms.
How much does a mortgage cost and what fees does it charge?
If you analyze the mortgage, mortgage and cash loan offers, you will easily notice that from the cost side, mortgage products look much better than a classic loan for any purpose. The best offer of such a loan has approximately twice as high APRC than the best mortgage loan proposal. In turn, the most favorable loan from the most favorable mortgage is less than two percentage points.
The most important mortgage costs are monthly interest and one-time commission for financing. The amount of interest depends on the interest rate. It consists of a variable interest rate and a fixed bank margin. The bank will charge a higher margin for leaving full freedom in spending funds than in the case of a mortgage.
The bank commission is always a percentage of the borrowed amount, which, depending on the institution, ranges from about 0 to 4.5 percent. So if you want to raise, for example, USD 150,000, it can range from 0 to 6000 USD.
When taking out a mortgage loan, apart from interest and commission, you must also take into account several other fees. First of all, the bank may require you to take out a life insurance policy and present a property valuation performed by an appraiser (cost from USD 400 up). You will also be required to insure a house or flat, which depending on its size and location may cost from several hundred to 1000 USD per year. So here we are talking about the same costs that you would have to deal with a mortgage.
When should you get interested in a mortgage?
Do you want to borrow several hundred thousand dollars for a dozen or more years? Or maybe you need a relatively small injection of cash, in the amount of USD 10,000 or 20,000? A mortgage will not be a good choice for you. The interest rate on such a product is relatively low, but with a large amount and long repayment period, it will generate high costs. In his case it is also unprofitable to borrow a small sum. Complicated procedures as well as the requirement to make a real estate appraisal and insurance cancel the sense of the whole operation.
In practice, you should be interested in a mortgage loan when you need more cash (minimum tens of thousands of dollars), and at the same time you are able to return it relatively quickly (preferably in a few years and a maximum of over a dozen). Such a product will work as a source of financing for a costly real estate project. It can be the purchase of complete equipment, a thorough renovation or construction of a garage. It can also be a beneficial way to finance your dream trip, wedding reception or buying a new car. On the other hand, indebted persons may use it to pay off other, higher-interest financial and credit obligations.
A mortgage can be considered the most advantageous product among those that give you the opportunity to borrow a large amount of money for any purpose. However, since it still entails considerable costs, you should apply to analyzing the offers of banks, and if necessary – use the help of a credit expert.