Oddly the word ‘mortgage’
A mortgage is a loan that is secured by real estate or property. A lender agrees to loan money to a home buyer for an agreed upon period of time and the home buyer agrees to pay the loan back with interest to the lender. The home is used as collateral against the loan. If the buyer pays the loan off in the agreed upon time frame, they then own the house. If the buyer defaults on the loan the lender has a legal claim on the home. Essentially the lender owns the home, but the home buyer has possession of the home unless the loan goes into default.
A mortgage is paid back to the lender in the form of agreed upon monthly payments. These monthly payments will usually include a principle amount plus interest, insurance and taxes. These taxes are usually in the form of property taxes.
Types of Loans
Basically there are three types of mortgages, fixed-interest rate mortgage, Adjustable-interest rate mortgage and an interest only mortgage. The mortgage that’s best for you will depend on your unique circumstances. You should research all options before deciding on which type of loan is best for you.
A fixed-rate loan is amortized over the life of the loan. This means that your payments will be based on the total of the loan being divided into equal monthly payments and the interest rate will remain the same throughout the life of the loan.
Since this type of loan is front-loaded most of the payments will go towards interest not principle in the first years of the loan. These loans can range in time from 10 to 30 years, with the most common one being the 30 year fixed-rate loan.
With an adjustable-rate mortgage the interest rate will change every year. Adjustable-rate mortgages or an “ARM’ for short are available in different forms such as a hybrid ARM that has aspects of both adjustable and fixed-rate mortgages. These hybrid mortgages will vary from 3 to 10 years as a fixed-interest loan, and then become an adjustable-rate loan for the duration of the loan.
An ARM can be very confusing for most people as opposed to a fixed-rate mortgage which is fairly straight forward. Be sure you completely understand the index which the loan is based on if you decide on this type of loan. The index is a measure of the cost of the money and there are many different indexes that lenders may use to calculate this rate. This is based on a margin. The margin is the amount that will be added to the index to determine the interest rate. Although the interest rate will change there is a limit on the amount it can change, this is known as a cap.
An interest only loan is an option for the home buyer who is interested more in the amount of their monthly payment, than they are in paying off their loan. An interest-only loan is usually only used for the first few years of the loan to keep the monthly payments as low as possible. This might be a young home buyer or a young professional whose income will increase in the coming years. Later this loan can be converted into another type of loan.
Before deciding on a loan it is important to research all the different types of loans and options that are available and decide which type of loan best fits your needs.