When a homeowner decides to borrow money from a lender with his property given as a guarantee, the bank or lending institution that he is applying for an agreement with, is called lien holder or lender. The homeowner who applies for the loan is the borrower. The lender is the holder of the title of the property conveyed by the owner; their agreement becomes terminated upon full payment of the debt. Consumer protection laws limit the amount of interest a financial institution can charge for any loan. The agreement on how the total amount loan is usually paid through amortization, that is if amortization is monthly, a fraction of the principal and a fixed interest shall be paid. Other forms of payment are not already practiced in some countries because some only require payment of interest. Thus, the borrower will pay the interest and the loan being applied is referred to as a mortgage.
What is the maximum amount of money the borrower can lend from the lender? The lenders usually give up to 80% of the total value of the property, which is called loan to value. How does property be given the value?
The first way is called real value; this is only possible if the borrower purchased the property from another. The payment made or the proof of purchase where the actual value indicated can be the basis for valuing the property. Second, is the appraisal done by a licensed professional of this concern, the one who will give the law value. Third is estimate; this is usually done in the absence of actual value. The lender in accordance with the legislation of the state will calculate the value of the property. Whichever way the value determined, 80% of it will be the amount granted to the borrower.
What if 80% of the loan given by the lender is not enough for the quantity needed by the borrower? Can the borrower make another loan to satisfy the required amount? Yes, provided he or she will agree to the second mortgage agreement, the loan made as an additional loan is called a second mortgage. If the second mortgage is done, the first loan is referred to as a first mortgage. What things should a person consider in the second mortgage?
The interest is higher than the first mortgage. The borrower is required to give private mortgage insurance. If in the long run, the borrower paid already above 20% of the value of the property the private mortgage insurance is not required.