Types Of Mortgages
According to the dictionary, mortgage can be broadly defined as a legal agreement between a lender and a borrower where a fixed asset such as property is kept as a security for the payment of debt. The lender would provide financial assistance to the borrower for the purpose of buying a home or a car, but would keep the possession of the title of the house or the vehicle till his debt is cleared by the borrower. In situations where the borrower is unable to repay the loan, the lender has the legal right to foreclose and sell the property.
There are various types of mortgage transactions depending on the requirements of the borrower.
Fixed Rate Mortgages: These loans are approved for a time period during which the interest rate is fixed. These loans can be for 15, 20 or 30 year term period. A term period of 30 years is the most advantageous of all since it offers maximum tax benefits. The borrower usually pays lower amounts in the form of monthly mortgage payments. Fixed rate loans with a time period of 30 years are beneficial in situations where there is no scope of increase in the current income. However, the interest payment is more on such a long term loan. Shorter loan terms such as 20 year or 15 year fixed rate loans are not usually offered by every bank or lender. These loans are difficult to qualify and require higher monthly mortgage payments. The only advantage through such loans is that the debt can be cleared in a shorter time period.
Adjustable Rate Mortgages: In this type of mortgage, the interest rates vary according to changes in the market and economic situation. These loans are offered at lower and fixed interest rates for the initial 2 to 3 years. Later, rates are adjusted. The interest rates change according to the loan term selected.
Balloon Mortgages: In these types of loans, the interest rate is far lower than the fixed interest loans for the initial period of 5 to 7 years. At the end of this period, the borrower is required to make a balloon payment in order to completely settle the debt.
Apart from the above, there are certain other types of mortgage loans which include Federal Housing Administration Loans, Veterans Administration loans, Reverse Mortgages, Rural Housing Service Loans and Jumbo Loans.
Types Of Mortgages
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