Mortgage loans are loans that can accessed using property or real estate as collateral. Here, the borrower enters into an agreement with the lender (usually a bank) to receive cash upfront after which he/she then makes payments over a set time span until the cash is paid back to the lender in full. A mortgage can also be referred to as home loan when it is used for the purchase of a home.
How Mortgage Loans Work
Mortgage loans are normally entered into by home buyers who do not have enough money on hand to buy a home. They are used to borrow cash from a bank for other projects with the house as collateral.
Just like any other financial products, Mortgages supply and demand differ depending on the market. Thus, banks can offer very low interest rates and sometimes can only offer high rates. If after a borrower agreed upon a high interest rate and later finds after a few years that rates have dropped, he can sign a new agreement at the new lower interest rate. (Refinancing).
Benefits of Mortgage Loans
Mortgages makes the dream of becoming a home owner a reality for most Americans.
Makes larger purchases possible for individuals who do not have enough money to pay upfront for the purchase of an asset.
Downsides of Mortgage Loans
- Lenders are at risk as there is no guarantee the borrower will be able to pay in future.
- Borrowers take a risk in accepting these loans, because failure to pay means a total loss of asset.
- Mortgages are not always easy to secure.
- Failure to repay a mortgage, results in confiscation and legal foreclosure and auction off of the property by the lending bank to cover it’s losses.
Mortgage Loan Types
There are different types of mortgage loans, from which buyers can choose the most applicable to their situation. Different loans, are characterized by their term dates (normally from 5 to 30 years) and some even offer loansof up to 50 year terms), interest rates (may be fixed or variable)and the amount of payments per period.
Fixed Rate Mortgage
Under fixed rate mortgage the 30-year mortgage, 20-year mortgage, and 15-year mortgage.
Adjustable Rate (ARM) Mortgage
Under this category, we have the variable rate mortgage, hybrid ARMs, and Option ARM.
These types of loans usually have a short term, often around 10 years and for most of the mortgage term, a balloon mortgage has a very payment, sometimes interest only.
This gives borrowers the option of paying a much lower monthly payment for a certain time, after which they’ll be required to start paying the principal.
A reverse mortgage, gives homeowners the access to their home’s equity in a loan that can be withdrawn in a lump sum, with set monthly payments or as a revolving line of credit.
The combination mortgage comes in handy to avoid Private Mortgage Insurance (PMI) if you cannot afford to put down 20% on a home.
Government Backed Mortgage
Under Government Backed mortgage, we have FHA Loans, USDA Loans, VA Loans, Indian Home Loan Guarantee and State local programs.
This is also known as hone equity loan. It is ideal if you have a home and have some equity built up in it.
Before you go for that mortgage loan, make sure you focus on the interest rate and fees as you compare rates.