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    Home » Blog » What is a Mortgage Loan? Meaning, Types and Benefits
    Finance

    What is a Mortgage Loan? Meaning, Types and Benefits

    adminBy adminNovember 15, 2024No Comments4 Mins Read
    Mortgage Loan

    A mortgage loan is an essential financing option that enables millions of people to achieve home ownership aspirations by providing funds to purchase real estate. While the premise seems simple—borrow money to buy the property and pay it back over the years along with interest—mortgages have some intricacies worth understanding as a home buyer.

    This article explains a mortgage loan, how it works, the different types available, and the benefits it provides for realising your dreams of owning a home.

    Table of Contents

    Toggle
    • What is a Mortgage Loan?
    • How Does a Mortgage Loan Work?
    • Types of Mortgage Loans
      • 1. Home Loan
      • 2.  Loan Against Property (LAP)
      • 3. Lease Rental Discounting (LRD)
    • Benefits of Availing a Mortgage Loan
    • Conclusion

    What is a Mortgage Loan?

    It is a long-term secured loan from a financial institution to finance a property’s purchase, construction, or renovation. Unlike other unsecured loans, it is secured against the same property to be purchased.

    The loan amount, tenure, interest rate, and EMI payable on a mortgage loan is based on factors like:

    • Value of property to be purchased
    • Your income, credit score, and repayment capacity
    • Mortgage loan type and loan provider policy

    Banks provide mortgage loans after thorough due diligence of property documents and buyer credentials. The property also gets registered in your name after the loan is approved.

    How Does a Mortgage Loan Work?

    Mortgages involve borrowing a large lump sum upfront to complete your property purchase in exchange for a commitment to repay in monthly EMIs over an agreed-upon tenure of, for example, 15-30 years.

    The EMI comprises two components:

    • Principal Amount: Part of the loan being repaid
    • Interest Amount: Cost accrued for borrowing money

    Hence, with every EMI, your loan outstanding keeps reducing while loan providers charge interest on the outstanding balance. At the end of the tenure, your property becomes free of any mortgage once the loan is repaid.

    Thus, if you fail to repay EMIs on time, loan providers can initiate legal proceedings and repossess the property.

    Types of Mortgage Loans

    There are several mortgage variants catering to different financing needs of borrowers:

    1. Home Loan

    The most common and popular mortgage option availed by individuals to finance the purchase of ready-to-move-in apartments or under-construction residential properties.

    It can also be used to construct a new house for home improvement or extension.

    2.  Loan Against Property (LAP)

    Loans against property enable raising funds against existing property owned by borrowing against its asset value.

    Business people often use them to meet working capital needs or personal expenses. Loans against property offer flexible tenure up to 10 years but carry slightly higher interest rates between 10% and 13% based on LTV ratio and credit score.

    3. Lease Rental Discounting (LRD)

    A specialised mortgage specifically targeted developers, builders or business owners who have constructed commercial properties leased out to earn rental income over the years at competitive interest rates.

    Also, mortgages come in fixed or floating rate types, like other retail loans. Fixed-rate loans offer predictable EMIs, but floating loans can become cheaper if the interest rate cycle turns downward. Select the option that fits your needs.

    Benefits of Availing a Mortgage Loan

    Mortgages serve as enabling catalysts to fulfil property ownership aspirations by providing the following advantages:

    • Raise substantial capital to fund a significant portion (70-90%) of property value, unlike constraints of personal savings alone.
    • Structured repayment flexibility through Equated Monthly Instalments (EMIs) over a long tenure instead of arranging one-time lump sum payment
    • Opportunity to build tangible ownership assets in the form of real estate for future financial safety net and wealth creation
    • Significantly lower interest cost compared to other unsecured high-interest rate borrowing modes like personal, gold or credit card loans

    Conclusion

    Mortgages empower the average Indian to purchase real estate by funding a large portion of the property value upfront in return for long-term EMI commitments. Their structured repayment flexibility makes homeownership viable by easing liquidity constraints.

    So, analyse your needs, loan eligibility, required mortgage type, and applicable charges before applying to identify the best option.

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