Have you ever wondered how a mortgage works? Acquiring a mortgage loan is one of the most popular ways of acquiring a home in Spain and much of Europe. Knowing its main elements will help you understand how it works and here we are going to show them to you.

Mortgages are one of the most widely known and used financial products in the world. This is a long-term loan granted to an individual to purchase a property, usually a home. The borrower must repay this loan with interest over a defined period of time.

How a mortgage works. Key elements

To better understand how a mortgage works, it is important to know the main elements that make it up. These elements include principal, interest rate, loan term, qualification requirements and additional costs.

1. The capital

The principal is simply the amount of money lent by the bank to the borrower. Usually this amount of money represents 80% of the value of the house, although there are loans of this type that can cover 100% of this value.

2. The interest rate

The interest rate is one of the most important elements when applying for a mortgage. Refers to the way in which the interest generated by the loan is paid to the bank. The interest rate directly influences the amount of money the borrower must pay to the bank each month.

• The interest rate of a mortgage can be fixed, variable or mixed. It is determined based on several factors, such as the term of the loan, the borrower’s credit history, among others.
• Fixed-rate loans. They have a fixed interest rate for the life of the loan, so the monthly payment is the same for the life of the loan.
• Variable rate loans. They have an interest rate that varies over time, so the monthly payment will fluctuate according to this variation. In Spain, the Euribor is used as a reference.
• Mixed-rate loans. They have a combination of the above two rates. Generally, the bank maintains a fixed rate for a defined period of time and then the remainder is calculated at a variable rate.

3. The term of the loan

The term of the loan is another element to consider. This determines the time the borrower has to repay the money along with interest. Mortgage terms can vary from a few years to 30 years. The term of the loan is also known as the “Amortization Period”.

4. Qualification requirements

Qualification requirements are another important part to consider when you want to know how a mortgage works. These requirements vary from bank to bank, but generally include a good credit history, a good financial situation and the ability to demonstrate a stable source of income. If these requirements are not met, you do not qualify for the loan.

5. Additional Costs

In addition, borrowers should be aware of the additional costs that may be involved in applying for a mortgage. These costs may include closing costs, taxes, insurance, among other charges. These additional costs will be described at the time of the contract, so you should be aware of them.

Suggestions for acquiring a mortgage

One of the best recommendations we can offer you as real estate lawyers is that, in order to acquire a mortgage, you should evaluate well if you can afford the monthly payments. The loan should not negatively affect your ability to save.
It is also important that, before taking out a mortgage loan, you compare several offers to make sure you get the best one. Knowing how a mortgage works will help you make an informed decision.