The four variables that you must control to know how a mortgage works

by TM Maria Be a king in your own kingdom

Do you really think you know what a mortgage is? Do you know that there is more than one way to repay the loan money? If this question has already left you with doubts, it is that you can still learn a lot about how a mortgage works. Finding out will help you make better decisions when you take out a mortgage or manage it with mortgage calculator.

The first thing to know is that a mortgage is a mortgage loan. In other words, it is a loan in which the house exercises as collateral, so that if the payments are broken the entity can keep the house to settle the debt.

Every mortgage is composed of four key elements: amount, interest rate, loan term and amortization method (how the money is returned). And the monthly fee? No matter how much is fixed by hiring a mortgage, it is only the result of what happens with the other three variables of the loan. If you modify any of the other four ingredients, the fee will also change.

Amount of the mortgage: the importance of calculating the additional costs

The amount of the loan is one of the variables that as a client we can decide within our circumstances. Most mortgages will finance up to 80% of the appraised value of the home. Therefore, the most widespread recommendation among experts is to have at least 20% of capital and also add other expenses associated with the purchase of the house and the mortgage.

Additional taxes for the purchase of the house include taxes. The taxes for acquiring housing vary depending on whether the house is new or second hand. Newly built apartments will have to pay VAT, which ranges from 4% for sheltered homes to 10% overall. In the case of second-hand housing, you will have to pay the Patrimonial Transfer Tax, which depends on each community and ranges between 4% and 10%.

The interest rate

The interest rate is the price that the financial institution charges for lending the money. In the end, it is the reflection of the risk that the entity assumes. There are different types of interest rates, each with its advantages and disadvantages:

Mortgage at variable rate. It is the most common in Spain. In these loans, the interest rate depends on a reference index, usually the Euribor, to which a differential is added. From there, review periods are established, so that if the benchmark index rises, so will the interests of the mortgage, and vice versa.

Fixed rate mortgage. A fixed interest rate is established for the entire life of the mortgage. The advantage of this formula is that you will know from the beginning how much you are going to pay each year for the mortgage.

Mixed Mortgage. The operation of this type of mortgages mixes variable rate mortgages and fixed rate mortgages. They set an initial period at a fixed rate and then a variable rate. Here you can see the differences with a variable mortgage.

In the interest rate it is important to differentiate the TIN from the APR. The first is the remuneration that the lender will demand as compensation for temporarily giving up part of its capital and forfeiting its use for a specific period of time. The APR, on the other hand, represents the effective cost of the loan as a percentage of the borrowed capital and includes, in addition to the interest applied to the loan, the term of the operation and other commissions and expenses directly associated thereto.

The term of the mortgage: how long it will take to return the mortgage

The term of the loan is the number of years in which you will return the money. In Spain, the average duration of mortgages on housing is 24 years, according to data from the National Institute of Statistics (INE).

The term is a key element for the mortgage fee. The longer a mortgage is, the less you will pay each month. You only need a mortgage calculator to make numbers. The only drawback is that a reduced fee is just the nice part of a long mortgage. As a general rule, the later you return the mortgage plus interest you will end up paying also in the total loan.

The repayment formula: how are you going to repay the mortgage?

The last element is the amortization model. In other words, what mathematical formula the bank will use to calculate how the money will be returned. Every loan consists of a capital to be amortized (what remains to be paid from the house) and interest to be paid. The amortization systems establish the relationship between both and what percentage of capital and interest is returned in each monthly payment.

The most used system in Spain is the constant amortization system or the French depreciation system. The main advantage of this formula is that the fee to be paid will always be the same throughout the life of the mortgage, except for the rises or falls of the reference index in a variable rate mortgage.