Types of Mortgage Loan
Mortgage loan is a term used for the loans secured by a property. Mortgage loans refer to a loan secured by residential property, often for the purpose of securing real estate. Mortgage loans are priced lower than other loan structures because the value of the property risk for the lender.
The mortgage loans are generally structured as long-term loans, the periodic payments are calculated to the time value of money. The amount of time is decided on the structure of the local economy.
The Mortgage loan can be divided in two broad categories :
I.Fixed Rate Mortgage Loans
II.Adjustable Rate Mortgage Loans
Fixed rate mortgage loan is a loan where the interest rate remains the same through the term of the loan. Fixed rate mortgage loans are the most traditional form of loan. A fixed rate mortgage loan has its own benefit. If the borrower is budget conscious, he will remain at peace because the monthly mortgage amount will not change.
An adjustable rate mortgage loan is a loan where the interest rate is periodically adjusted based on an index. This is followed to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index.
An adjustable rate mortgage loan permits borrowers to lower their payments if they are willing to assume the risk of interest rate changes. To avoid this risk many mortgage originators either sell or securitize their mortgage, depending on their need. An adjustable-rate mortgage loan and a fixed-rate mortgage loan differ from each other in various ways. Besides the difference in the interest rate structure, an adjustable rate mortgage loan payments may go up or down accordingly.
Besides, Fixed rate and adjustable rate , there are other types of loans also, which can be described as:
"Interest only mortgage loan : Interest only mortgage loan is a loan in which for a set term the borrower pays only the interest on the principal balance, with the principal balance being unchanged.
In other words, this is an arrangement, where the borrower is only paying off the interest on the loan. The capital debt is supposed to be repaid by the end of the mortgage loan term. The idea behind these interest-only mortgage loans is that the borrower should have a separate plan to enable him to repay the capital sum at the end of the mortgage loan term.
"Graduated payment mortgage loan: Graduated payment mortgage loan is often referred to as GPM. A graduated payment mortgage loan is loan with low initial monthly payments which gradually increase over a specified time frame. The idea is to target young men and women who cannot afford to pay large payments initially, but realistically expecting them to do better financially in the future.
"Negative amortization mortgage loan: Negative amortization is when the principal amount of the mortgage loan actually increases as the borrower pays his monthly payments. This is because the payment amount, as structured with the negative amortization loan, is so low that it doesn't even cover the full amount of the interest. Therefore, the interest continues to compound and the principal amount is never touched.
While this may not sound like a very good loan program for most buyers, a negative amortization mortgage loan is sometimes the best-if not the only-option for homebuyers who have very little to contribute toward a monthly payment.
Against these advantages of various types of mortgage loan, a borrower has to weigh the risks that comes along with it as well.
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