Types Of Mortgage Loans
The financial decisions you take while buying your dream home determines to a great extent the success of your investment. You can take out a mortgage loan to own your dream home. A mortgage loan is a loan that you avail from a lender against collateral. For instance, if you are planning to buy a home and you take out a mortgage loan from a lender, you use your home as the security against which you are borrowing the money. In case you fail to make payments to the lender, the lender will have the right to take away your home. The collateral acts as a safety net for the lender.
Types of mortgage loans There are different types of mortgage loans. However, there are 2 basic amortized mortgage loan types and they are as follows-
- Fixed-rate mortgage or FRM:
FRM is the most common type of mortgage loan. In this type of mortgage loan, the principal as well as the rate of interest remains fixed throughout the loan tenure. The mortgage payment consisting of the principal amount as well as the interest is fixed every month. The loan term is usually for a fixed period and may be 10, 15, 20 or 30 years, the last loan term being more common. In the initial years, you have to make payments for the interest. Later on you start making payments for the principal amount and it is during this period that you start building equity in your home.
While stability is one of the biggest advantages of a fixed rate mortgage, if the rate of interest is very high, affordability becomes a cause of concern.
- Adjustable-rate mortgage or ARM:
Adjustable-rate mortgage or ARM is a mortgage loan type where the rate of interest changes along with the changes in the market conditions. As compared to a FRM, in case of ARM in the initial years you are required to make payments for a fixed rate of interest. The loan term may be of 3, 5, 7 or 10 years. After a certain time period, the mortgage interest rate becomes applicable and adjustable.
Mortgage loan modification Recently, many borrowers have been opting for mortgage loan modification. In mortgage loan modification also known as loan workout, the existing terms of the loan are altered to benefit the borrowers. If your loan workout Mortgage loan modification Recently, many borrowers have been opting for mortgage loan modification. In mortgage loan modification also known as loan workout, the existing terms of the loan are altered to benefit the borrowers. If your loan workout request is approved, the lender allows you to make payments as per reduced rate of interest, your loan term may be increased or you may enjoy lower principal balance. However, you have to prove your inability to make mortgage payments.
The Mortgage Glossary – Mortgage and finance terms and definitions.