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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