Howdy Wall St. Willy! My friend Daniel asked me about a Mortgage. But what is a mortgage anyway?
Well a mortgage is a loan you take to buy a home.
Well, can I get more money in a mortgage than what the home is actually worth. So like, if my home is worth $100000, can I get a mortgage for $200000?
No. You usually take the mortgage for 80% of the home’s value and the other 20% of the home’s value is your down payment.
What is a down payment?
Banks always take down payment for a mortgage because they just want to be safe and make sure you can pay at least that much money at one time which means that usually you’ll be able to pay the rest of the mortgage.
So if you are taking mortgage for a $100000 home, you’ll be taking mortgage for approximately $80000 and then you’d make a down payment for $20000.
Well can I buy a home if I don’t have the whole 20% down payment?
Yes, you can. There are special mortgages like FHA mortgages that allow you to pay less than 20% down payment but that’s a topic for a separate video.
Well, how is the mortgage amount even decided?
The mortgage amount is decided by your income, other payments you have like student loans or car payments, your credit score and the value of the property that you are taking the mortgage on.
And also, it can be decided based upon how much money you put as down payment.
Well, how long do I have to pay the mortgage for?
You usually have the pay the mortgage for between 10 and 30 years but the most common term is 30 years.
30 years? That’s a lot of time!! Well, how frequently do I pay the mortgage? Like do I pay once every year, once every day or do I pay everything at once?
No. you pay the mortgage amount slowly every month.
How much do I have to pay every month?
The amount that you pay every month depends on the mortgage amount, how long the mortgage is for and the interest rate.
Well, what happens if I can’t make a mortgage payment?
But, if you cannot still catch up on your payments after a couple of months, the bank will make a foreclosure which means that the bank will take possession of your home and sell your home to get its money back.
Well, what happens if I finish all of the payments?
Then the bank has no claim on the home and the home is 100% yours. And you also will not have to keep paying the bank every month.
Yay! Anyway, are banks the only ones who can provide a mortgage?
No, there are many other financial institutions that can. For e.g., credit unions can also give a mortgage.
Well, I am interested in learning about the interest rate on a mortgage. Is there anything else you can tell me about it?
There are 2 kinds of interest. The first is fixed interest and the second is floating interest. But that’s a topic for another time.
Thank you very much for telling me about a mortgage, Wall St. Willy.
You are welcome, Sooper Cooper. Remember, Finance is Your Friend!