Mortgage loans are legally binding financial instruments, which are collateralized by an asset (usually a house or other property.) When you take out a mortgage loan, you pledge your home as collateral in exchange for a loan amount. The loan amount will be determined by your credit rating, your ability to repay, and the interest rate offered by the lender. As you may have guessed, there are many different types of mortgage loans available. They include fixed-rate loans; adjustable-rate loans; and low-rate and no-cost loans. Each one differs in the ways that they operate and the terms they offer the borrower.
Mortgage loans are made when borrowers pledge property as collateral. This means that if you should default on your home loan, your lender can take possession of the home and sell it to recover the outstanding balance. In contrast, commercial property loans involve a much lower initial cash outlay, but the risk of loss is much greater.
With a fixed-rate mortgage loan, the initial loan payment is set at the rate of a fixed interest rate for a certain period of time, usually 30 years. Borrowers who wish to make monthly payments throughout their loan term will need to opt for amortization. Amortization is a type of process that allows the borrowers to spread out their debt over a longer period of time without increasing the principal balance. Although the monthly payments may increase slightly as a result of inflation, the principal amount will not. Homeowners who choose to use amortization will find that their monthly payments decrease, and the total amount of their mortgage loan will decrease as well.
Adjustable Rate Mortgages
This type of mortgage is different from fixed monthly payment mortgages because the initial interest rate may change throughout the term of the loan. For example, if the initial rate is fixed for three years, then it might increase to four percent in five years and then reduce again. This type of mortgage is very similar to a fixed rate, except that the borrower will have the option to adjust the interest rate as well.
Many mortgage loans feature balloon-type features. These features combine the features of adjustable-rate mortgages with the convenience of a short-term loan. Typically, these types of loans feature a balloon payment at the end of the term, which is where the borrower must make all of the balloon payments in order to complete the loan. Since the payment amount is small at the beginning, many people choose to take advantage of this type of loan by choosing a low-interest loan term.