A mortgage is a guarantee, established between the lender or creditor and the person who receives the mortgage loan to ensure compliance with its payment.

Mortgages are the financial product that allows many people to have the necessary economic amounts to rehabilitate or buy a home or other real estate.

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By virtue of the mortgage, the mortgage creditor can promote the forced sale of the property encumbered with the mortgage (usually real estate) if the guaranteed debt is not satisfied within the agreed period. In this case, the amount obtained from the forced sale serves to pay the due credit (or at least part of it).

Credit institutions require a series of guarantees before granting any loan. In the case of mortgages, the loan holder provides as guarantee the mortgaged property itself in addition to their personal guarantee.

Characteristics:

Mortgage repayment periods are longer and have lower interest rates than personal loans. The reasons are 2:

1. The real guarantee of the mortgaged property represents a low risk for the financial institution.
2. The high amounts requested.

However, a mortgage is a complex product. During its processing, concepts and operations are used that you must know and understand.

A mortgage loan is made up of two elements:

1. A loan contract: by which the loan applicant certifies the obligation to return the amount of money lent plus interest and expenses agreed upon within a period agreed between both parties.
2. The guarantee that the property buyer provides to the lender, in this case the mortgage itself.

Mortgage loan amount:

It is the money that the lending financial institution delivers to the applicant. The amount depends on:

• Borrowing capacity of the applicant. For its calculation, banking entities use a series of parameters that allow determining the amount that the applicant can satisfy each month. Usually this amount is between 35-40% of their net income.
• The appraisal value of the home or property, which has nothing to do with the purchase price and serves as a reference so that the agreed price does not deviate too much from market values. Authorized Appraisal Companies (independent companies accredited and registered in a registry regulated by the Bank of Spain) are responsible for performing these appraisals.

Types of mortgage loans:

The price that banking entities charge for lending their money is the interest rate. This can be fixed, mixed or variable:

• Variable interest rate: It is reviewed periodically (usually annually or semi-annually) and adjusted to market conditions, according to some reference index such as Euribor (we will talk about them later). The amortization periods of mortgage loans with this type of interest are longer, normally between 20 and 30 years or even more.
• Fixed interest rate: The interest rate and monthly payment remain fixed until the loan is extinguished. At the time of contracting, an interest rate higher than variable rate mortgages is usually established and the amortization periods are shorter (maximum 20 years).
• Mixed interest rate: The interest rate remains fixed during an initial period (3-5 years) and then becomes variable.

Reference interest rates for mortgage loans currently applicable:

1. Euribor (One-year Interbank Reference): It is the most used. It is an average of the interest rates offered by a representative sample of European banks for operations between euro deposit institutions with a 1-year term.
2. IRPH (Mortgage Loan Reference Index for All Entities) is the average rate of mortgage loans of more than three years granted by banks and savings banks during a certain period of time.
3. IRS (Interest Rate Swap). It is a 5-year interest rate instead of one year like Euribor.

Remember that variable interest rates not only depend on the reference interest rate, but on the reference rate plus the differential agreed in the loan contract (Euribor + 2.1% for example).

Mortgage amortization payment

The amortization payment is the amount that the beneficiary of a mortgage loan must pay periodically to the banking entity that has granted it. The most common is monthly although other periodicities can be established.

Mortgage amortization period

It is the period of time established in the loan contract for the total return of its amount.

Mortgage nominal interest rate

It is the percentage applied to the pending payment amount of a loan, to calculate the interest that must be paid.

Mortgage grace period

It is the period within the amortization period during which only the interest on the loan is paid and the capital is not amortized.

Mortgage commissions

They are the amounts charged by the financial institution for intermediation and management services involved in the mortgage loan.

In most mortgage loans, they are the following:

• Opening commission: it is a percentage charged by the banking entity at the time of granting the mortgage loan. It includes administrative and management expenses associated with the opening. It is normally between 0% and 2% of the loan amount.
• Subrogation commission: it is the commission paid to the financial institution for changing the loan holder. It is calculated on the amount remaining to be paid.
• Cancellation commission: It is paid when the total return of the remaining amount of the mortgage loan is made.
• Early amortization commission: it is a commission charged by the banking entity if amounts of the mortgage loan are paid in advance.
• Novation commission: It is a commission paid to the financial institution when the conditions of a mortgage loan are renegotiated. The commission is a percentage of the outstanding payment amount.

We hope this information is very useful to you.