Definition of the term mortgage and a brief outline of how a mortgage works.
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Anyone who builds or buys a home can often cover only part of the costs with his or her own funds. The remaining capital is then borrowed - usually with a mortgage. According to the definition, this is not the credit itself, but primarily a lien on the property. Because of the lien, the loan which will be used for the construction or purchase of a property is secured by the property itself. Colloquially, the word 'mortgage' is nevertheless important as the corresponding bank overdraft is designated with the term. The official title, however, is a mortgage loan. If you would like to understand how a mortgage works, you'll find the answer in this article.
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What exactly is a mortgage?
If the term does not mean the loan, then what exactly is a mortgage? The definition of the word is derived from the Greek word 'hypothéke' for collateral. This means that the mortgage holder, i.e. the one who takes out a loan for the construction or acquisition of a property, only receives this credit from the creditor after paying a deposit as collateral. Banks or building societies are usually considered as lenders, although insurance companies and pension funds can also assign a mortgage. These lenders are entitled to use the deposit in the event of a default of payment, for example, through a foreclosure, and to use the proceeds to cover the capital requirement.
In most cases, a mortgage note serves as collateral. It is a security that secures the lien. The mortgage note exists in two forms: as a traditional paper debenture with retention and security obligations, and as a non-paper registered mortgage note in which the lien is only registered in the land register. A security in a strict sense is not issued.
How does a mortgage work?
In order to obtain a mortgage, two minimum requirements must be met, as defined by the banks: the loan-to-value ratio and the affordability must be within certain limits. The loan-to-value-ratio, i.e. the ratio between the mortgage and the market value of the property, must not exceed 80 percent. This means, in reverse, that at least 20 percent of the market value must be raised with own funds of the borrower. Own funds are not just about cash, inherited assets or private loans. Pension funds from the 2nd and 3rd pillars may also be withdrawn in advance or pledged in order to increase the own funds. The second requirement is the affordability of a mortgage. Put simply, this means the gross income must be able to cover all expenses for interest and amortization, as well as the maintenance of the property. The mortgage payments should not exceed a third of the gross income.
If the requirements are met, the mortgage amount can be calculated. This is the sum that must be included in addition to the borrower's funds for the financing of the home or condominium. Basically, there are three mortgage models that play a role in financing: fixed-rate mortgages, variable-rate mortgages and LIBOR mortgages. The latter two models, in particular, are based on fluctuating interest rates. All three models have specific advantages and disadvantages. You should seek concrete offers from banks and insurance companies only when the conditions are clarified. However, it is difficult to determine at the first glance whether or not the offers are appropriately tailored to the individual life situation of the borrower or how favourable the proposed conditions are.
MoneyPark will advise you in detail on all matters relating to your mortgage. Our definition of independence means that your wishes and ideas are the focus of our activities. Together, we will choose the mortgage products that are right for you from among more than 150 financing partners, so that we can offer you the best possible conditions. Make an appointment with MoneyPark today.
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