Mortgage Loan
The method of using a real or personal property as
security usually for the payment of a debt is known as
mortgage. A loan taken on the basis of this mortgage is
referred as mortgage loan. Mortgage loans are lower in risk
compared to other kinds of traditional loans because of the
associated value of property. In fact in many countries
mortgage loans are used for funding of ownership of private
residential properties.
The basic structures of mortgage loans are generally long
term. The payments are quite similar to an annuity and
calculated by following the formulae of time value of money.
The main fundamental deal requires a fixed monthly payment for
a period ranging from ten to thirty years. This, however, may
vary depending on various local conditions.
One can find many types of mortgage loans worldwide.
There are four basic components of mortgage loans, which is
common to each and every type. These are interest, term,
payment amount and frequency, prepayment.
Interest: An interest rate in a mortgage loan may
be either fixed for life or variable. In fact it may change
depending on pre-defined phases whenever the interest rates
are higher or lower.
Term: Generally, mortgage loans have a maximum term
period. Here term is referred to the number of years after
which an amortization loan is to be paid back. One can
find some mortgage loans, which require complete repayment of
whatever remaining balance on a certain date.
Payment amount and frequency: The borrower may have
the option of either increasing or decreasing the monthly
amount to be paid. Not only this, the borrower also has the
option of changing the stipulated time period of
payment.
Prepayment: In some types of mortgages a limitation or
restriction for all or a portion of loan may be
applicable.
The two basic types of mortgage loans are fixed rate
mortgage and adjustable rate mortgage. In the fixed rate
mortgage type, both the interest rate and periodic payment
remains same during the term of the loan. In the U.S. this
term generally lasts up to 30 years. One can avail or get
offers on longer terms only in certain cases. One of the
prominent characteristics of the fixed rate mortgage loan is
that there is no change in the payments meant for principal
and interest during the tenure of the loan. But other
supplementary costs may change or fluctuate depending on the
conditions of the market.
Just the reciprocal or the opposite happens in case of
adjustable rate mortgage. Here, initially the interest rate
remains fixed for a certain period of time, either annually or
monthly. After that the rate fluctuates according to the
market rate. This kind of mortgage loan is preferred where
funding on fixed rate is not easy to find or is expensive.
In adjustable rate mortgage loan, the interest rate is
decided on the basis of credit reports and scores. Higher
scores give a lender or borrower a favorable position. In fact
in some cases they are offered low and cheap interest rate
because of the low level of associated risk. But if the lender
has bad scores then a higher rate of interest is charged
because a higher level of default is
involved.
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