BASICS OF A BOND

A mortgage bond is a long-term loan that uses real estate as collateral. A mortgage loan is commonly used for buying a home or other real estate. In fact, a mortgage bond is the only legal way to secure property as security.
 
If you borrow money from a lender and sign your property as surety, that surety is meaningless unless registered with the office as a bond over the property. This control was introduced due to the abuse of land and surety that used to take place decades ago, where many land owners lost their land due to unscrupulous lenders. Remember the old western movies?
 
The modern mortgage market offers a variety of mortgage loans catering to the needs of homebuyers. The titles and details of these plans can become confusing, especially as new types are introduced continuously. You can make sense of these loan types, however, if you understand the basic principles that govern all mortgage loans.  Again, you can look to your real estate professional for assistance.
 
BASIC PRINCIPLES OF ALL BONDS

• The home is used as security to back up the loan. A lender can force sale of the home if the borrower defaults by failing to make scheduled payments.
• The larger the loan compared to the value of the home, the more risky for the lender and, often, the more expensive the loan will be.
• Interest earned by the lender always is equal to the periodic interest rate times the outstanding principle balance of the loan. The periodic interest rate is the annual interest rate divided by the number of payments in the year (usually one per month).
• The required payment usually is a bit larger than the interest due so that some of the loan principal is repaid with each payment. This process is called Amortization and is why most mortgage loans can be retired when all the monthly payments have been made.

COMMON FEATURES

• Fixed payment and fixed interest rate - fixed rate mortgages
• Fixed rate but variable payment - graduated payment mortgages
• Variable rate and variable payment - adjustable rate mortgages

As you learn more about the types of financing available, you will notice that some loans appear to have more favorable terms. That may indicate that those loans are, indeed, bargains (and it does pay to shop around), but usually it means that those loans could have some feature that is less appealing to borrowers.
 
For example, shorter-term loans often have slightly lower interest rates compared to longer-term loans. However, the monthly payment for the same amount of principal may be higher because of the shorter term. Variable rate loans usually have much lower interest rates to compensate for the risk the borrower accepts that interest rates will rise in the future.
 
REPAYMENT METHODS
 
Most mortgage loans require monthly payments of the interest, an amount for the principal debt as well as amounts that are set aside for items such as life and home insurance if these were taken up as part of your bond. These are generally termed “traditional” bonds.
 
Although it is rare in these days of tight credit markets, some lenders may still offer "nontraditional" mortgage loans such as interest-only loans, in which case the borrower pays only the accrued interest and none of the payment is used to reduce the principal balance, or loans where the borrower chooses each month whether to make a minimum payment, pay the accrued interest only, or pay the accrued interest and a portion of the principal.
 
The obvious danger of not settling any of the capital, is to find your self in twenty years time with a home you still owe money on.
 
THREE KEY POINTS

• Shop Around
• Assess your options and get advice from your agent, bond originator and others
• It is the home buyer's obligation to fully understand the terms of their loan.

For details on the various costs involved in buying a property go here

For more detailed information on Finance issues go here
Go back to Buyers main page