• Mortgage Loans & Different Types of Interest

    A mortgage loan is obtained against a real estate asset. A mortgage note details about the transaction including the encumbrance that comes with such a loan. The word ‘Mortgage’ is taken from a French Law term that means ‘death contract’ but in a different sense. It refers to the death or end of a pledge once the entire financial obligations are met or after foreclosure of property. 

    Only the house owners enjoy the prerogative to obtain loans against their physical asset on a condition that that they will make a payback within a scheduled period of time, otherwise the lender will possess the collateral for foreclosure. The common sources of securing mortgage loans are bank and credit union. You can directly approach any of these two financial institutions or reach for the loan through intermediaries. 

    Due to increasing economic crisis, there has been a growing dependence on mortgage loan. The market is a lucrative one for spinning of money and that has given rise to a good number of new entrants. Loan tenure, interest rate and other charges, repayment criteria etc. differ a lot from one lender to another. 

    Types of interest rate for mortgage lending
    Depending on the type of interest rate, mortgage loans are broadly classified as fixed interest mortgage or FRM and adjustable (variable) interest mortgage or ARM.  In most of the countries, adjustable or floating mortgage rate is very common. A combination of both types can also be availed where the rate is fixed for a certain time period, say 10 years and after that adjustable rate applies. 

    In fixed rate mortgage loans, the borrowers need to payback a fixed sum throughout the loan term. It has both pros and cons. The plus point is you can make an adjustment in your monthly budget because you already know the amount of periodic payment. The negative side is though the ancillary cost changes, payment remains fixed for the entire life of the mortgage loan.

    Variable mortgage rate presents a polar opposite picture. It varies monthly or annually as agreed upon during dealing. In such type of mortgage rate, a part of the risk borne by the lenders is passed to the borrowers. 

    Variable mortgage loans are a standard in the industry whereas the fixed mortgage loan is not easy to avail. As far as cost factor is concerned, fixed mortgage loan is more expensive. If compared to variable mortgage loan rate, fixed mortgage type is 0.5-2% less costly if each of them is taken for 30 years.

    1 comment:

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