What is the mortgage?

The mortgage is a legal document that secures the note and gives the lender a legal claim against your house if you default on the note's terms. In effect, you have possession of the property, but the lender has an ownership interest (called an "encumbrance") until the loan has been fully repaid. The lender agrees to hold the title or deed to your property until you have paid back your loan plus interest.

The down payment is the part of the purchase price that the buyer pays in cash and does not finance with a mortgage. The larger your down payment, the less you will need to borrow. The less you need to borrow, the smaller your mortgage payments will be. Lenders often view mortgages with larger down payments as more secure because you have more of your own money invested in the property.

Mortgage amount and term

The mortgage amount is the amount of money you borrow from a lender to pay for your house. The term is the number of years over which you can pay back the amount you borrow. The length of your mortgage repayment period will directly affect your monthly mortgage payments. For the same mortgage principal amount, you will find that the shorter your repayment period is, the higher your monthly payments will be, but the total interest you pay over the life of the loan will be less. On the other hand, the longer your repayment period is, the lower your monthly payments will be, but the total interest you pay over the life of the loan will be more. By extending payment over 30 years, you keep your monthly housing costs low. If you can afford higher monthly payments, you can select a mortgage term that is shorter.

During the term of your loan, you will pay back your mortgage by making regular monthly payments of principal and interest. In the early years of your loan, most of the money you pay will be for the interest you owe. Toward the end of the term of your loan, you will be paying primarily principal. This type of repayment method is called amortization.

Fixed interest rate and adjustable interest rate
Some mortgages have an interest rate that is fixed for the entire term of the loan. One advantage of a fixed-rate loan is that you know your interest rate will never change over the term of your loan. An adjustable-rate mortgage (called an ARM) has an interest rate that varies during the life of the loan. The interest rate with an ARM may increase or decrease based on market interest rates. Consequently, your mortgage payments may go up or down. Also called: Adjustable Rate Loans, Adjustable Rate Mortgages, Flexible Rate Loans, Variable Rate Loans.

Taxes to Pay

1.- Impuesto sobre Bienes Patrimoniales - ITP (Estate Tax): It supposes 6% of the price declared in the deed, that it does not have to coincide with the price of the property. This tax is incompatible with the IVA (VAT).

2.- Impuesto sobre el Valor Añadido - IVA (VAT): Value Added Tax. It is applied to the house of new construction, and supposes 7% of the price declared in the deed. This tax is incompatible with the ITP.

3.- Tributos Municipales:
- Impuesto sobre bienes inmuebles (IBI): As popularly known contribución urbana (urban contribution). It is paid annually, generally during the last trimester of the year. Its tax type is fixed to a percentage of the house´s cadastral value.
- Plusvalía (Land Value Tax): It burdens the increase that experiences the value of lands between the moment of its acquisition and its sale. The owner is the one who has to pay it, unless both parts stipulates the opposite in the transaction contract.

4.- IRPF (Income Tax): For the purchase of a house as the main one, the buyer can reduce the tax on a percentage of the paid amounts so much for price as of other expenses originated by the transaction, although with a maximum limit on its tax basis.

Also the buyer will be able to deduce as expenses the interests of the mortgage. On the other hand, and from the deed of transaction, the buyer will have to include like entry in the income tax return, the value that turns out to apply a certain percentage on the cadastral value of the house or on its price in deed if this last one were superior.