Mortgage Loan

Mortgage Loan

Mortgage Loan

Introduction

A mortgage is a kind of loan secured by the guarantee of a specific piece of real estate property. Actually, the term "mortgage" refers only to the promise of property provided by the mortgagor (borrower) to the mortgagee (lender), not a promissory note that guarantees (Hu, 2001). In simple words, a mortgage is a loan that is secured by the underlying assets and can be recovered in case of borrower default (Reed, 2010). There are several key attributes that determine the mortgage in questions, which can be characterized by the following dimensions (Fabbozi et al, 2011).

Discussion

Mortgage can be thought of as either paying off debt or building up equity. However, equity will increase proportionally even though constant amounts of payment will be made. The graph below can be a good example to understand the notion.

In order to calculate the amount owed for one year, the equation that can be used is

Amount owed= (principal + interest for one year) - annual payment

For calculating the interest paid for the year the following equation can be used

Interest for the year = principal amount * interest rate

However as the amount owed will be paid back there will be a reduction in principal amount and therefore, each year principal amount will be reduced by the amount paid, along with the interest. For instance if the mortgage loan was $100,000 at an interest rate of 5% with annual payment of $6,000 following equations can be used to calculate the interest amount and amount owed.

Interest paid= 100,000 * 5%= 5,000

Amount owed= ($100,000+ 5,000) - $6,000

Thus at the end of the year amount owed would be= $99,000

Although the annual payments were $6,000, yet the amount owed at the end of the year is $99,000, which has decreased by $1,000 only, which should ...