Financial Dictionary - Mortgage
A mortgage is a security instrument that allows the buyer to receive a certain amount of money from a financial institution in exchange for a commitment to return the amount loaned plus the corresponding interest in periodic payments.
It is important to note that although we commonly call it a mortgage, we are actually referring to a mortgage loan. A mortgage loan is a debt established with a financial institution, while a mortgage is the guarantee that this debt will be repaid and it is given directly on the property that is acquired.
Every mortgage loan has various basic elements:
- The principal refers to the amount of money the bank has lent us and in most cases is less than the price of the property.
- The interest indicates the additional amount that we must pay to the institution that granted us the mortgage loan. This amount can be fixed or variable.
- The repayment term is the maximum time in which we must repay the amount loaned by the bank. ¿
What are mortgage loans used for?
Mortgage loans are normally used to obtain a large amount of money using an asset as collateral. In most cases, these types of loans are used to purchase a home.
What types of mortgage are there?
There are three different types of mortgage according to their interest rates:
- Mortgage loans at fixed interest: these are loans in which the monthly payment is the same throughout the duration of the loan. Regardless of whether the rates go up or down, the amount will not change.
This type of loan will never be affected by the ups and downs of the Euribor. They tend to have higher amortisation fees than the other types, so early redemption of the mortgage will be more expensive.
- Mortgage loans at variable interest: these loans are made up of the value of the benchmark index, the Euribor in most cases, and another fixed spread. Usually the instalments are reviewed annually or semi-annually. In this case, the instalments will vary depending on increases or decreases in interest rates when the review occurs. Variable mortgages tend to have lower fees and longer repayment periods.
- Mixed mortgage loans: this is the least common type. It combines the application of a fixed rate for part of the term and a variable interest rate for the remaining period.
Usually the repayment instalments do not vary in the first years of the term, and subsequently the instalments will start to vary depending on interest rates.