Working towards attaining a dream is one thing but realizing it is another thing. When most people get well paying jobs, one of the first items they want to buy is a house. But many are limited to acquiring their dream houses due to insufficient funds.
But today, banks have come on board to give out loans to finance potential home owners to purchase properties in form of mortgages. A mortgage loan, also known as a real estate loan, refers to a legal instrument that pledges a house or other real estate as security for repayment of a loan. Though mortgage financing is a new trend in Uganda, it is slowly
picking up within the working class population, notably those with stable incomes.
What is a Mortgage?
According to the Microsoft Encarta Encyclopedia, mortgages are typically long-term loans and the interest rate charged can be either a variable or a fixed rate for the term of the loan, which often ranges from 15 to 30 years.
By providing a guarantee that the loan will be paid back, a mortgage enables a person to buy property without having the funds to pay for it outright. The land and buildings purchased may also serve as the collateral for the loan. If the borrower fails to repay the loan, the lender may sell off the property to recover the amount of the loan.
The mortgage lending process has two instruments, a note and a mortgage. The note specifies the financial terms of a loan agreement. The mortgage contains a legal description of the property and a statement that pledges the property as security for the loan. However, the word mortgage commonly refers to both parts of the loan agreement as a whole.
The two most common mortgages are the fixed-rate mortgage and the adjustable-rate mortgage. With a fixed-rate mortgage, the interest rate stays the same over the life of the loan. With an adjustable-rate mortgage, the interest rate can change at the end of
pre-determined intervals, such as every six months or every year.
Getting a mortgage
In Uganda, banks like Stanbic and Barclays and some microfinance institutions give out mortgages. Stanbic Bank’s current market 2 months offer is for one to apply a home loan and get a refund of 30% on legal fees.
Most lenders require the borrower to have a certain amount of money to use as a down payment toward the purchase of the house. For example, if an individual wants to buy a home priced at 100 million shillings and the lender requires a down payment of 5 million
shillings, the individual will apply for a loan of 95 million shillings to pay for the difference.
Banks usually require detailed information about borrowers to assess their ability and willingness to repay a loan. For example, a borrower will be asked about income, employment history and credit history. The lender will also inquire about any debts, such as a car loan or credit card balances. Ojera Jimmy, a banker says that banks do background checks on to ensure that the borrower’s ability and trust worthiness to pay back the loan.
Property Appraisal for the Mortgage
Before the lender agrees to a loan, an appraisal of the property, usually by qualified property valuers, is done. The appraisal provides an estimate of the property’s value. The lender wants to be certain that the property is worth at least as much as the loan in
case of seizure if the borrower fails to pay.
If all requirements are met, the lender agrees to the loan. The loan agreement specifies the current interest rate and the loan’s repayment terms. The terms of repayment specify how much the regular payments will be, how frequently they will be made, and over how many years. The interest rate and the duration or life of the mortgage determines the amount of the payment. Payments are usually made monthly. The life of the mortgage can be 15, 20, 30, or even 40 years.
Ojera says that to accept the loan, the borrower must sign a promissory note that obligates him/her to repay the mortgage debt. The borrower also promises to keep the property insured against fire and other hazards, and to pay any property taxes that may be owed. If the borrower fails to keep any of these obligations, the loan is considered to be in default, and subject to cancellation.
The actual transfer of funds and property takes place at the closing. At the closing the lender transfers money to the borrower for buying the house and the borrower signs the mortgage documents. The borrower also pays the lender any fees associated with borrowing the money. These might include origination costs for creating and processing the loan, fees for obtaining reports on credit history, and fees for obtaining an appraisal.
Repaying a mortgage
Mortgage payments consist of two parts: payments for interest and for principal. Interest is the fee for using the lender’s money. Principal is the amount of the loan still owed. A portion of each payment pays interest and the remaining portion reduces the principal.
The process of paying off the principal while paying interest is called amortization, which means to make small regular payments over a period of time to pay back a debt. When a homeowner begins to repay his or her mortgage almost all of each monthly payment pays
for interest. This changes as the loan ages, even though the amount paid each month may not change.
Each month’s payment reduces the principal by a small amount; therefore less interest is owed the next month. Since less interest is owed, more of the payment can be used to reduce the principal. Gradually less of each month’s payment is needed to pay
interest, and more goes to reduce the principal.
Other, less common mortgages include the balloon mortgage and the graduated payment mortgage. A balloon mortgage is a short-term loan. The borrower makes payments for some period of time and then makes one large payment at the end. The graduated payment mortgage starts out with low monthly payments, which gradually increase over time before stabilizing.
However, before you wish to get a mortgage loan, it is vital to note where your general finances will stand. Will you be able to finance other priorities in your life? Ojera says that it is advisable to be sure that the loan you take out suits your financial status
In that line, it is prudent to ensure that your source of income is reliable and sustainable in the long run to be able to make payments.
By Olive Eyotaru