Mortage amortization
Unlike consumer durables, and cars, the value of real estate properties is really large. It is difficult to systematically save for it as by the time one saves a given amount the value of the property shoot up substantially, making it all a fresh saving effort. Therefore, borrowing in present time and paying from future earnings is the right way to catch the bus. Assets such as real estate and vehicles are generally acquired through mortgage amortization. Many bankers and lenders offer such amortizable mortgages..
Three major factors that they look into for such mortgage are
- Borrower's repayment capacity and track record of debt repayment
- Borrower's title and rights on property or asset
- Adequacy of the property's value to cover the loaned amounts
For ascertaining the borrower's repayment capacity, these bankers and lenders do not view merely the present earnings. They also consider the future earnings of the borrower. This enables them to sanction larger loan amounts and plan their recoveries. Effectively, it is the borrower's rights and titles on the asset or property that are mortgaged to the bankers. The borrower can continue to utilize the asset or property, irrespective of the fact that the rights and title in respect thereto have been mortgaged.
The loan sanctioned on the mortgage is repayable over a long period. For example a borrower takes a mortgage loan of $80,000. This loan may be repayable over 30 years in monthly installments.It may carry interest at the rate of 10 percent per annum, calculated on outstanding loan amounts also known as reducing or diminishing balance method. From this data, it can be deduced that the loan is to be repaid in 360 monthly installments.
Each monthly mortgage amortization installment is comprised of two components, which are the interest component and the principal component. If mortgage loan is to be amortized in equated monthly installments, then as the time passes, the principal component within the installment increases and the interest component decreases. It follows therefore that in the initial stages, the interest component in the equated monthly installments is larger than the principal component.
Amortizable mortgages can be used to
- Raise money for consolidation of existing costlier debts
- Raise money for acquiring another real estate property
- Raise funds for businesses
- Raise funds for refurbishing the existing premises
- Raise funds for any personal requirements
- Raise funds for purchasing vehicles or other consumer durables
Advantages of mortgage amortization
- The interest component from the equated monthly installments in home loans is eligible for tax rebates
- Enables the borrower to afford a costly asset or reduce costly liabilities
- The value of the mortgaged real estate property appreciates over the term of the loan. Therefore, once the loan is cleared, the borrower is left with an asset that is considerably higher in value than what is repaid as loan and interest. This, however, does not hold true for other assets such as cars, which are also obtained through mortgage loans that are amortized.
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