What Are Mortgages and How Do They Work?

Individuals and businesses use mortgages to make large real estate purchases without paying the entire purchase price upfront. Herein is all the basic information you need to know about mortgage acquisition.

What Are Mortgages and How Do They Work?
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For many people especially in Kenya, mortgages are seen as a foreign concept and many people do not really understand what a mortgage is and how it works but after reading this you will be able to understand what a mortgage is and how it works, and maybe you may consider taking a mortgage on your next house purchase.

So what are mortgages? A mortgage is simply a loan given to an individual by a bank that a person can use to purchase a home, this is very different from other loans because in the event that the person fails to pay the loan the house is seized by the bank as collateral.

How do mortgages work? Let's say you want to buy a house in Runda and this house is going for 2 million shillings and at that particular time, you do not have that amount of cash. So you will have to go to a bank and ask for a mortgage.

In this case, you will have to give a down payment and this is the amount you pay upfront and in most cases, it is usually 15-20% of the original price so in this case, you will have to pay sh.400, 000 upfront. You then have to borrow the remaining 1.6 million.

After the banker carefully reviews your financial statements and credit statements he / she may decide to grant you a 1.6 million mortgage which may be at a 7% fixed rate with a 7-year term and 25-year amortization. For purposes of clarity, we will break down what all this means.

This simply means that you must pay a 7% interest rate per year and the 7-year term means that you are locked into this payment for the next seven years. Amortization simply means the time you will take to completely clear the loan and own the home entirely in this case it is 25 years. Am guessing its sounds really simple?

One main advantage of taking a mortgage is that instead of always paying rent to that annoying landlord what simply happens is that the more you pay off the mortgage the more you inch closer and closer to becoming a homeowner.

To put this into perspective, there are two sides to this and those are equity and debt. Equity is what you as the individual owner and debt is what you owe the bank. So every time you make a payment you turn that debt into equity.

For most people taking a mortgage has not always been an option just because they do not understand how mortgages work but am guessing with the above information taking a mortgage is now an option and in addition to this, it is also a sure path to help you achieve your dream of becoming a homeowner.