Mortgages are mostly referred to in the real estate environment. Nevertheless the word and/or the underlying functions are unknown many. Where, for example, the concrete difference between fixed, variable and so-called Libor mortgages, know only a few. So that this changes, we provide remedy. In addition, this guide provides important information on whether a mortgage can be canceled at all or whether it stands in the way of a potential house sale. But first from the beginning.
What exactly is meant by the term a mortgage?
To answer this elementary question, a comparison with the land charge, sometimes mistakenly used synonymously, is also indispensable. First of all, a mortgage is nothing more than a lien on real property. It is used as collateral for loans. Mortgages are also recorded as land charges in the land register of a property. In the course of construction financing, by the way, it is not the mortgage itself that is deposited as collateral, but rather the land charge.
In addition, mortgages are considered accessory. Behind this word is the fact that a mortgage must always be tied to a receivable. The mortgage is reduced as part of the repayment of the mortgage loan, whereas the land charge remains in full and is not linked to any receivables. Land charges are generally easier for lending institutions to handle.
An overview of the various types
Mortgage is equal to mortgage? This is definitely not true. Indeed, anyone who decides to take out a mortgage has many different models to choose from. Each of them is accompanied by specific advantages and disadvantages, which will be examined in more detail below.
- Fixed-rate mortgage: It forms a relatively inflexible package with fixed interest rates for the entire term of the loan. On the other hand, a certain predictability of payments is implied for the borrower in this way. A fixed-rate mortgage can be worthwhile especially if there are again times of favorable capital market interest rates. Nevertheless, it is always advisable to compare the different conditions available on the market with each other. Only in this way can it be ensured that in the end the choice really falls on the optimal offer.
- Variable Mortgage: Unlike the option just presented, there is everything here, but no long-term interest rate certainty. As the name suggests, the interest rates are not set in stone, but are subject to fluctuations and are primarily dependent on the capital markets. Thus, they can be adjusted up or down from time to time. Variable mortgages are suitable for properties that are to be sold soon anyway.
- Libor mortgage: This model provides for mortgage interest rates to be adjusted at regular intervals. How long these intervals are in concrete terms is difficult to say in general terms. Often, however, it is a matter of intervals of about three, six or even twelve months. With this approach, Libor mortgages are similar to their fixed-rate counterparts, but have a much shorter term overall. The interest rate on the loan is determined by the bank on the basis of the Libor interest rate. An agreed margin is also added.
- Reverse mortgage: The name sounds very strange at any rate. No miracle thus that it requires here as cogent an explanation as possible. Often also known as a reverse mortgage, this is primarily an annuitization. What exactly happens? The lender pays the owner a lifelong annuity, but in return takes over the mortgage. In most cases, a lifelong right of residence is also granted. A reverse mortgage can be the means of choice, especially for a secured retirement.
What else there is to consider
In addition to these four briefly described variants, it is not uncommon to speak of so-called book and letter mortgages together with a mortgage certificate. Book mortgages are registered in section III of the land register. The issuance of a mortgage certificate is excluded in this case. The latter is available in the case of a letter mortgage. Finally, the creditor receives the mortgage deed for safekeeping. So much for the dry theory.
Who is actually entitled to a mortgage?
In principle, anyone can obtain a mortgage, provided that the conditions of the bank in question are met. As security however always a real estate must be offered. In addition, the majority of institutions also require a regular income, a generally good credit rating and sufficient equity capital. The loan should also serve a residential purpose. The exact conditions for the granting of mortgages are of course reserved for the banks and therefore differ from case to case.
How are house and mortgage related?
How exactly to take out a mortgage on a property, many wonder. Basically, the process involved is not that difficult. Also the type of mortgage does not play a decisive role here. First of all, a loan must be applied for from the bank. If this loan is subsequently granted, the mortgage must be provided as collateral. A mortgage is created by the approval on the one hand and the registration on the other hand. The entry in the land register is arranged by a notary, who also takes care of the order. A corresponding mortgage letter is available for those who have opted for a letter mortgage. Special consultants can help with further ambiguities.
Mortgage and loan – what is the difference??
Sometimes these two terms are confused with each other or even considered to be one and the same thing. Of course this is not correct. Therefore, now a brief distinction and the clear definition of what can be understood by a loan and what can be understood by a mortgage.
A credit means a special monetary value, which is made available on the part of a bank or another financial service provider for a certain period of time. It can be intended for different purposes, for example, for cars or real estate. The mortgage, in turn, secures the loan as a lien on the property. If therefore colloquially the speech of a "Mortgage on a house" is, this means nothing else than that the house serves the lender as security against possible payment defaults of the debtor. Should the latter actually have difficulties in repaying the loan or be unable to repay it at all, the creditor is entitled to foreclose on the property, thanks to the mortgage. In practice, however, this is fortunately rather an extreme case.
Are mortgages actually earmarked?
Although mortgages, as just mentioned, are most often used in real estate purchases, they are in fact not necessarily earmarked for a specific purpose. Thus can be financed with the loan for example also different desires such as a old timer, if an unencumbered real estate is present and this may be lent otherwise or can be lent. Also in such a special case the real estate serves the bank as security.
How to cancel a mortgage?
A notarized deletion approval – which, by the way, is necessary – is then handed over to the borrower when the underlying construction loan has been repaid in full. Then the land charge can also be cancelled. The owner of the property also receives the mortgage deed, if this was available at all. After presentation of the deed, the mortgage is finally also deleted at the land registry office.
What fees are incurred when taking out a mortgage?
Who thought that the admission of a mortgage is free, must be disappointed at this point unfortunately. In practice, borrowers have to calculate with some costs, which should not be underestimated in advance. This includes in particular the following.
- Costs for the so-called mortgage lending value determination
- Annual interest
- Costs for registration in the land register
- Notary fees for the mortgage
- Any commitment interest in case the loan is not disbursed on time
- General processing fees
So it turns out that taking out a mortgage has some extra costs in reality. How high these turn out concretely, can be said only in the individual case exactly. Especially with an already quite tight budget, however, these fees must be well weighed, so that in the end no nasty surprise threatens.
Short conclusion
Mortgages primarily serve banks and other financial service providers as collateral for potential payment difficulties on the part of debtors and occur primarily in the real estate environment. In practice, however, there are some peculiarities, which were presented in the guide above. With further questions the advice of an advisor specialized in mortgages is to be caught up absolutely, who should remove still existing ambiguities expertly.