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By Emil76 (Own work) [GFDL or CC BY-SA 3.0], via Wikimedia Commons

What is a mortgage?

A mortgage is a debt instrument, secured by the guarantee of determined land property, that the borrower is obliged to pay back with a foreordained arrangement of installments. Mortgages are utilized by people and organizations to make substantial land buys without paying the whole estimation of the buy in advance. Over a time of numerous years, the borrower reimburses the credit and any additional fees incurred until he/she inevitably possesses the property with complete ownership. Mortgages are otherwise called "liens against property" or "cases on property." The bank can foreclose the property if payments are stopped by the borrower.

 

Types of Mortgages

 

Fixed Rate Mortgages

A fixed rate mortgage means your interest rate will stay the same through out the lifetime of the mortage. A fixed rate mortgage is typically 15, 20 or 30 years. Usually the longer the term for the mortgage the higher the interest rate will be. This is balanced out by the fact that the monthly payments are usually higher for a shorter term. 

 

Adjustable Rate Mortgages

An adjustable rate mortgage (ARM) usually has a low starting rate that is locked in and does not change for a short period of time. After that period of time the rate is adjusted each year. What is adjusted to depends on the terms of the mortage. Make sure to read and understand the terms of the mortgage. If you have any questions, ask your lawyer that is handling your real estate transaction.

 

Example:

A 7/1 ARM is a mortgage where the first 7 years have a fixed rate. After that it will change each year depending on the terms of the mortgage.

 

Adjustable rate mortgages (ARMs) can be risky for borrowers, as the monthly payments may jump significantly from month to month, depending on what the interest rate is tied to. There are many options for ARMs depending on the lender. Some lenders limit the amount an interest rate can increase when an adjustment is made, while others offer variable adjustment schedules (more often or less often than annually). Lenders also sometimes offer longer periods of time with no adjustment. ARMs can be a good option for homebuyers who expect to sell the property before the first adjustment is made.

 

Interest-only mortgages

Interest-only mortgages have their disadvantages. Before starting principal and interest payments, a borrower pays only the interest for a specified amount of time. Because of this, the borrower has no chance to build equity while they're only paying interest. After this period, the monthly payments become higher than they could have been since the borrower hasn't been paying down the principal. These interest-only mortgages also have an adjustable rate component. At the end of the mortgage's term, the borrower will typically have to make a balloon payment to payoff the remaining principal of the loan.

 

Piggyback mortgages

A piggyback mortgage is akin to taking out two mortgages, literally "piggybacking" onto a traditional mortgage by using the first mortgage to get a home equity line of credit. It's a loan based on the value of the property, meant to lower the down payment, and typically carries a higher rate. Both mortgages must be paid back at the same time.

 

 

What do mortgage lenders look for?