A contract in which a bank lends money to an individual against their property as security is known as a mortgage loan. The individual is expected to pay the principal amount along with some interests and additional costs within a pre-decided tenure. However, if a person fails to repay the loan, the bank or the lender has the authority to sell the property to recover the loan money. So, is taking a mortgage a good idea or is it a loan to avoid? Herein, we discuss some of the advantages and disadvantages that come with a mortgage loan and why some may wish to avoid taking it.
Advantages of mortgage loans
- Provides an opportunity to increase buying capacity
With the price of property increasing rapidly every year, it has been getting harder for individuals to own property. This is where a mortgage loan helps. With some help from the bank, individuals can increase their buying capacity and get their dream home.
- Lower interest rates
The interest rates on mortgage loans are lower. This is for a simple reason that the property of the individual is with the bank as security. The lender or the bank has got nothing to worry about. If the borrower is not able to repay the loan, the lender has the authority to sell the property to recover the debt. The lower rate of interest is a big boon.
- Easy repayment
There are easy monthly installment schemes available for the borrower to repay the loan. For example, the loan can be taken for a tenure of 25 years and the borrower can repay the amount every month. When the total amount is to be paid monthly, the payable amount is usually a fraction of your monthly salary.
- Maintains a good credit score
If you have paid all your monthly installments on time without any default, it will reflect in your credit report. It will help you maintain a good credit report, which will help you in getting other loans at a lower rate of interest in the future. When you repay your loan on time, you increase your credibility and creditors do not think twice before giving you more credit.
Disadvantages of mortgage loans
- Pay more than you have borrowed
Mortgage loans have a rate of interest tied to them. Therefore, by the time you finish paying the complete loan, you have paid the principal, the rate of interest, and some other additional charges. Sometimes, the rate of interest charged by some creditors is very high, making it a loan to avoid. If you require the loan in an urgent situation, you are bound to overlook the high rate of interest in such conditions.
- Additional charges
In addition to the principal amount and the interest, the borrower is made to pay some extra charges. These charges include legal and insurance fees that may not look very big at the beginning but are a monetary toll once you start repaying. Carefully analyze your reasons and finances, and decide whether a mortgage loan is something you can put in your “loans to avoid” category.