The Kinds Of Mortgages obtainable

A mortgage is an agreement between a borrower/mortgagor and a lender/mortgagee. The former applies for a mortgage or a loan for a lump sum payment or for the buy character and promises to pay on installment complete amount by paying regular installments of the principal and interest. The latter either approves or denies the application based on the amount of or kind of risk the applicant presents and requires the former to use the character buy as a collateral or as a security in case of non payment. This article will discuss the different types of loans that you may encounter.

A Definition of Terms

Before discussing the types of mortgages let us first define some mortgage terms.

Principal: the amount of payment that is directly applied to the payment of the amount loaned. For example, if Mr. A loaned $600,000 payable on 12 equal monthly installments then the principal per installment is $50,000.

Interest: the amount paid over and above the principal, representing the lenders profit. In the above mentioned example if the interest is 1% per amortization then the interest payable is $5,000 per amortization.

Annual percentage rate (APR): the total interest per year. In the above mentioned example there are 12 amortizations in a year. consequently the APR is 1%x 12 = 12% APR.

Fixed Term Mortgage

This kind of loan is the ideal kind because the interest rate is stable and does no change from the first to the last installment. For example, the contract of loan or the promissory observe provides that the interest payable per amortization is 1% from start to finish. Tip, negotiate for a lower interest rate taking into consideration your credit rating and score.

Adjustable Rate Mortgage (ARM)

This kind of loan provides for an initial fixed term of 1 to 5 years and then the interest changes based on a specific market, standard or index. Of course in theory the interest rate may fall if the index during the change computed with the rate is lower but in practice this almost always never happens. The enhancement is capped for each increase and for the complete interest rate. For example, the promissory observe provides that the interest rate will not rise more than 1% per increase but in no case shall reach 10% interest per amortization.

Balloon kind Mortgage

This kind of mortgage provides that the mortgagor pays regular amortizations and a lump sum payment within specific intervals. For example, Mr. ABC is made to pay $500 per month and at the same time must pay $5,000 every 12 months. This kind of loan effectively lowers the regular amortization but burdens the mortgagor with a huge lump sum payment. This is a very good choice for a borrower who earns a huge bonus at the end of the year or has a trust fund payable to him/her each year.

Principal Only Mortgage

This is a very scarce kind of mortgage given to valued customers or given as a promotional scheme to a select few. The lender gives a lump sum payment and refrains from requiring the borrower to pay anything over and above the amount owed. For example, Mr. A is given a mortgage for $120,000 payable on 12 monthly installments without interest. consequently the amount given to Mr. A is the same amount he will pay in 12 months.