What is meant by mortgage?
Mortgage refers to a secured loan issued to borrowers against collateral, including assets such as houses, property, etc. Mortgage loans allow borrowers to secure high loan amounts for a long period of time.
The asset that is kept as collateral stays with the lender till the full repayment is made. These loans are usually availed to buy immovable assets. At the time of the purchase of the mortgage, the lender would pay the entire loan amount.
However, the borrower must eventually repay the loan amount in subsequent years. These types of loans also involve interest payments which are paid over the principal amount. The payments are made monthly over the entire duration of the loan.
How does a mortgage work?
Mortgages may also have short term payments or long-term payments. Interest rates are also agreed upon beforehand; they may be same throughout the duration of the loan or they may vary. Additionally, borrowers may be asked to fulfil a certain criterion before they can be issued a mortgage loan.
Mortgages usually have a long duration such as 20 to 30 years. However, the mortgage repayment process can be made quicker by making larger payments within a lesser amount of time. However, making long-term payments could mean higher interest payments compared to when the repayment is made within a lesser duration of time.
However, each loan repayment procedure can be worked out individually depending on the agreement between the borrower and the lender. The lender owns the property till the total loan amount has not been repaid. However, upon completion of the loan repayment, the lender cannot hold any authority over the asset given as collateral.
What does a mortgage loan entail?
Mortgage loans have different moving parts that make them function. These components include the following:
What are the different interest rates offered on mortgage loans?
There are two types of mortgages offered based on the type of interest rate charged by the lender. These include:
A fixed-rate loan may be a better option when one is settled into his or her career and prefers paying only a fixed amount each month.
Adjustable-Rate Mortgages, or ARM, can be right for some borrowers who plan to move or refinance by the end of the fixed-rate period. This type of mortgage may allow access to lower interest rates than one could find on a fixed-rate loan otherwise.
How are mortgages different from a loan?
A loan may also include unsecured loans, which do not require collateral for financing the loan. Thus, any transaction that involves one party lending to another can be termed as a loan.
However, mortgages involve high sums of money and are secure loans involving collateral. They are typically used to finance a property, and it can be considered as a type of loan. But not all loans can be considered mortgages.
What is earnest money? Earnest money refers to a sum of money that is paid by the buyer to the seller as a form of reassurance of future payments during the sale of a house. Paying earnest money is also beneficial to the buyer because it gives him leverage to arrange the remaining funds. Earnest money can be deposited via a direct home deposit, an escrow account or in the form of good faith money. How does earnest money work? Earnest money is paid before closing on a house sale. When the seller and buyer come to an agreement on the house sale, the seller must take the house off the market. Earnest money serves the purpose of assuring the seller that the deal would not fall through. The amount paid as earnest money is usually 1-3% of the total sale value of the house. Most sellers prefer to hold earnest money in an escrow account. In case the deal does not materialize, the money can be given back to the buyer directly from the escrow account. This removes the concerns any buyer may have about whether the money would be returned by the seller or not. In case the buyer and seller go ahead with the sale, the earnest money becomes a part of the down payment. Thus, the buyer would only pay the remaining amount of the down payment. However, in case the agreement does not materialize between the buyer and the seller, the earnest money is returned to the buyer after deducting the escrow fees from it. With money locked in on one house, buyers are less likely to close a deal with any other house seller. How is the amount of earnest money decided upon? The percentage of the total amount that can be taken as earnest money varies from state to state as policies are different. Additionally, the market scenario is also a major factor affecting the amount of earnest money to be paid. Under normal conditions, 1-2% of the total sale value can be taken as earnest money. However, if the market does not have a high demand for houses, then the percentage charged as earnest money could be lower around 1%. In markets with high demand, this percentage could be as high as 3%, or even 5%. To outbid other buyers, one can pay a larger sum of money as earnest money. This would increase the buyer’s chances of securing the property. Why is earnest money important? Earnest money may not always be mandated by the seller, but in a highly competitive market earnest money may be necessarily required. Paying the earnest money makes the agreement official. Without earnest money, the deal may not be considered official in many regions. It is one of the four stages of payment while making a deal on a house. However, in certain instances, even after the payment of the earnest money, the deal may not materialize. Typically, a buying agent should be able to assist the buyer in such a case. What conditions must be met for earnest money to be refundable? Earnest money has certain contingencies attached to it for the protection of both the seller and the buyer. Even after the seller has accepted the earnest money deposit, there are certain contingencies that must be met before the deal can be finalized. These include the following: Home inspection contingency: This contingency is placed so that buyers can back out of the agreement in case the there are some faults in the property, and it is in need of repair. However, it is not necessary for the buyer to call off the deal in such a case. He can simply work with the seller to reach a mutual decision rather than scraping away the deal completely. Financing Contingency: It might be the case that a buyer had not been approved for a mortgage before making the earnest deposit. Here the financing contingency would protect the buyer. If the mortgage does not get approved even though the earnest money had been paid, then the financing contingency allows the buyer to walk away from the deal along with the refunded earnest money. Appraisal Contingency: This protects the buyer in case the property has been overvalued. Here the lender can hire a third-party investigator who can examine whether the property has been priced at a fair value or not. If the value of the house comes out to be higher than the fair value, then the buyer can walk away with a refund. Additionally, this contingency can be used to bring down the price of the sale too. Contingency for Selling the Existing home: It is quite possible that contracts are made based on whether the buyer can sell an existing home or not. If the buyer is unable to sell the existing home, then he can walk away with a refund. These contingencies can be waived by the buyer in case he is sure that the deal would close and there would be no backing off. However, it is important to note that contingencies can provide an extra cushion against adverse circumstances and they might come in handy in certain cases. What is the difference between earnest money and good faith deposit? Both terms can be used interchangeably. However, all good faith deposits are not the same as earnest money. A good faith deposit can be made directly to the mortgage lender, while earnest money is usually held in an escrow account. Both serve the purpose if providing a sense of security about the buyer sticking to the same deal and not going elsewhere. The good faith deposit eventually forms a part of the lending process. However, in case the deal does not materialize, it is possible that the borrower would not get his good faith deposit back.
In case of property, Negative equity arises when the worth of your real estate property decreases below the mortgage secured for purchasing it. It generally happens due to falling property prices where the current market value of the property is less than the balance on the outstanding mortgage.
Who are Fund Managers? Fund Managers, aka Investment Managers, Money Managers, are the institutional investors that manage money on behalf of their clients, which may include individuals and groups. Often referred to as Smart Money, they are perceived to be equipped with better resources and information. Investment management industry is huge and includes a range of asset classes and products like equity, fixed income, global, country-specific, multi-asset, commodity, money markets, IPOs, fund of funds, real estate. A firm seeks to fulfil investment goals of the clients, which may include pension funds, insurance companies, endowment funds, charity, corporations. When you go shopping for funds, you will find a range of products from different businesses. Investment Management (IM) refers to the complete management of funds, which are invested in securities. IM professionals devise an investment strategy for the fund and raise money from the public to implement the strategy. They are not just involved in buying and selling of securities but a broader range of processes, including research, strategy implementation, development of strategy, income distribution of funds, banking, performance evaluation. Investment Management is also referred to as Funds Management, Asset Management. IM companies are traditionally known as buy-side firms since these firms mostly purchase securities, whereas sell-side include institutions that are selling the research, providing research facilities. Buy-side firms include IM companies, pension funds, insurance funds, endowment funds, sovereign wealth funds, mutual funds. These institutions invest in a significant amount of funds and invest for the purpose of funds management. Sell-side firms are more into insights, research, advisory, promotion, market-making for the companies. These firms may also provide services like broking, investment banking, advisory, and deal in transactions like IPOs, capital raising, investment research, trading and settlement. IM businesses are regulated by a market regulator in most of countries. Regulators also ensure that investor interests are protected, market ethics are maintained, and necessary disclosures and regulations are honoured by the companies. Read: ASIC Issues Notice to REs of MISs to Ensure Balanced & Accurate Information In Investment Fund Advertising Fund Management companies charge fees to their clients, which is expressed as a percentage of money invested in the fund. The revenue earned by funds managers tends to fluctuate due to market movement in funds/assets under management. Sometimes IM companies also charge performance fees depending on the stated performance hurdles. Active Management: In this type of IM, the manager seeks to invest in asset classes in an index-agnostic approach by actively picking stocks based on proprietary or sourced research rather than a benchmark. Passive Management: Passive Investing vehicles have gained a lot of demand over the past two decade, largely due to lower fees. Investment Managers benchmark portfolio to an index and try to replicate the performance of the benchmark. More on passive investing approach: What Is Passive Investing? Type of Fund Managers/Funds Equity: They invest in equity or stocks, which happen to be among leading asset classes in the history of mankind. Equity funds are relatively riskier but boast better return potential as well. Investment Managers can further segregate these funds into sectors, countries, market capitalisation. Bonds: Also known as Fixed Income Funds, the money is invested in fixed income instruments like Government Bonds, Corporate Bonds, Perpetual Bonds, Asset-backed Securities, Mortgage-backed Securities etc. Good read: Fixed Income Securities – A look Into Bonds Multi-asset: In this strategy, the objective is to invest in multiple asset classes, including commodity, equity, bonds, currencies, derivatives. These funds seek to deliver risk-adjusted returns based on the prevailing investment climate. Index: Index Funds are one of the passive investing vehicles seeking to match the performance of the underlying benchmark. These funds are available at relatively lower fee expense and provide exposure to only a group of asset classes based on the benchmark index. Real Estate: Real Estate funds invest in real assets like property and land. These funds further segregated into a type of the properties under management like commercial, retail, office, residential, industrial. Must read: Australian Real Estate Investment Trusts Global: A global fund is allocated across geographies and provides exposure to industries of other nations. These funds also provide currency exposure to the investor as well as diversification. Speciality: Speciality managers can run a range of funds based on their belief, such as e-commerce fund, agriculture fund, e-vehicle fund, disruptive or innovation fund, cannabis fund, country-specific fund, ESG fund, automated vehicle fund. Hedge Funds: Hedge funds have grown extremely popular over the past decades because of their high returns, which come with similar scale of risks. These funds invest in a range of asset classes, including commodity, equity, bonds. Investment managers charge a relatively high fee. Related: Hedge Funds Now Focused on Refined Oil Products What is an investment philosophy? An investment philosophy is something you apply when constructing an investment strategy. It is your perception of market and the wide variety of asset classes available in markets. It also reflects how investor behaviour has evolved over time. Understanding a fund managers investment philosophy is paramount. Some investment philosophies: Value Investing: Value investing is perceived as picking stocks that are available at a discount to current market price. Investors prefer businesses that are underestimated by large sections of markets, thus undervalued. Watch: Kalkine Big Story - Value Investing amid Market Correction Growth Investing: Growth investors chase companies that are exhibiting better-than-average in earnings. The expectations from growing enterprises are generally higher due to stage of business, target market, product, disruptive products. Growth Stocks have delivered substantial return over the last decade and continue to be market darlings. Related: How To Identify A Growth Stock? Arbitrage Investing: In this philosophy, investors seek to benefit from the existing inefficiency of asset prices. This practice in markets also ensures that price of asset classes do not stay diverted from fair-value for a long time. Arbitrage strategies can be applied on almost every liquid asset classes that are available to trade. Market Timing: Investors seek to maximise their returns by undertaking investment decisions based on a future prediction of the asset class. Market Timing predictions can be based on Fundamental Analysis, Technical Analysis, Economic Conditions etc.
Lenders use qualifying ratios in the underwriting approval procedure for loans. Banks make use of qualifying ratios to identify whether the borrower is eligible for a mortgage or not.