Connect with us

Different types of home loans

Different types of home loans

Money

Different types of home loans

Mortgages come in a variety of forms. The most common types are 30-year and 15-year fixed-rate mortgages. Some mortgage terms are as short as five years, while others can run 40 years or longer. Stretching payments over more years may reduce the monthly payment, but it also increases the total amount of interest that the borrower pays over the life of the loan.

Types of Mortgages you need to know

The following are just a few examples of some of the most popular types of mortgage loans available to borrowers.

Fixed-Rate Mortgages

A fixed-rate mortgage (FRM) is a mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or “float”. As a result, payment amounts and the duration of the loan are fixed and the person who is responsible for paying back the loan benefits from a consistent, single payment and the ability to plan a budget based on this fixed cost.

Fixed-rate mortgages are characterized by loan amount, interest rate, compounding frequency, and duration. With these values, the monthly repayments can be calculated.

Fixed-rate mortgages are vulnerable to inflation risk, which means that borrowers with such mortgages are better off under unexpectedly high inflation (as the inflation lowers the real present value of their loan repayments), while they are worse off if there is a drop in inflation that lowers interest rates. Fixed-rate mortgages usually charge higher interest rates than those with adjustable rates. According to scholars, “Borrowers should generally prefer adjustable-rate over fixed-rate mortgages unless interest rates are low.

Adjustable-Rate Mortgage (ARM)

A variable-rate mortgage, an adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender’s standard variable rate/base rate.

There may be a direct and legally defined link to the underlying index. Still, where the lender offers no specific link to the underlying market or index, the rate can be changed at the lender’s discretion. The term “variable-rate mortgage” is most common outside the United States, whilst in the United States, “adjustable-rate mortgage” is most common, and implies a mortgage regulated by the Federal government, with caps on charges. In many countries, adjustable-rate mortgages are the norm, and in such places, may be referred to as mortgages.

Interest-Only Loans

An interest-only loan is a loan in which the borrower pays only the interest for some or all of the term, with the principal balance unchanged during the interest-only period. At the end of the interest-only term, the borrower must renegotiate another interest-only mortgage, pay the principal, or, if previously agreed, convert the loan to a principal-and-interest payment (amortizing) loan at the borrower’s option.

Reverse Mortgages

A reverse mortgage is a mortgage loan, usually secured by a residential property, that enables the borrower to access the unencumbered value of the property. The loans are typically promoted to older homeowners and typically do not require monthly mortgage payments. Borrowers are still responsible for property taxes or homeowner’s insurance.

Reverse mortgages allow older people to immediately access the home equity they have built up in their homes, and defer payment of the loan until they die, sell, or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower (or the borrower’s estate) is generally not required to repay any additional loan balance in excess of the value of the home.

Click to comment

You must be logged in to post a comment Login

Leave a Reply

More in Money

To Top