A mortgage loan is one which is taken from banks, private mortgage brokers or online brokers. These loans are taken by pledging owned property in order to buy another residential or commercial property. They are sometimes taken to even refinance another loan. Mortgage loans generally extend over a period of 15 to 30 years. The payment amounts are distributed depending on the exact number of years, the type of mortgage and the decided rate of interest. The property that is purchased serves as security in case of a debt. In case the borrower defaults, in terms of the payments, the lender can sell the property by using the foreclosure process.
In order to be sure that the borrower can make the payments, there are a few key points that lenders examine beforehand. The main aspects considered are the down payment, monthly income and the credit score of the borrower. The down payment amount bring the risk of the lender down in case of defaults, the monthly income will reflect the borrowers capability to make monthly payments and the credit scores show the risks of lending to the borrower. Higher the credit score lower the risk for the loan.
Types of loans
• Interest-only mortgage: This type of a mortgage loan requires the borrower to pay only interest for a specified time period. After this period the loan is usually changed and there is a new mortgage amount. This new amount will be repaid with principal payments plus the left over interest amounts.
• Balloon mortgage: This mortgage gives the borrowers a lower rate for a fixed period. The period usually varies between 3 to 10 years. Once this fixed period passes, the borrower has to pay the entire principal amount.
• Sub-prime mortgage: A sub-prime mortgage is meant for people whose credit score is low. This means the risk for the lender is higher. In order to compensate for this, the interest rate and monthly payments are also higher. Lenders usually earn good money by giving out these loans. But if the borrower pays the due amount before the time expected, a prepayment penalty has to be paid by the lender.
• Fixed rate mortgage: These mortgage loans have a fixed rate over the loan period. They are very popular as rises and falls in interest rates do not influence these rates. No matter what, the interest rates remain the same in these mortgages.
• Home equity line of credit: These are also known as HELOC’s. The mortgage rates are variable in line with the prime rate. This lasts for 3 to 10 years after which the borrower is required to pay back the entire principal amount like in balloon mortgages.
• Adjustable mortgages: This is a mortgage loan where there is a fixed rate for a specific time period. After completion of this time period the rate of interest is adjusted according to the fluctuating market rates. These loans are the most commonly taken loans after fixed rate mortgage loans.