What is Mortgage?
Mortgage refers to borrowing money from lender by keeping something as security. In case, the borrower fails to repay the money in time, the lender will have the right to seize the property or even sell it. In general, mortgage refers to mortgage of house and the lender gives money keeping the house as the security. While giving money, both the parties (borrower and lender) come under an agreement and failing to follow the same gives exclusive rights on the property to the lender.
Though there are several types of home mortgages, broadly they can be converted into two types
Types of mortgages
1)Fixed Rate Mortgage
2)Adjustable rate mortgages
This broad classification is based on the rate of interest. In the former type, the lender won’t have any flexibility to increase (or decrease) the interest rate and the same amount of interest is charged on the principle amount at any time. In case of adjustable rate mortgage, the lender will have the flexibility to increase(or decrease)the monthly premium based on the financial situation at that time. Let’s have a look at pros and cons of Fixed rate mortgage and Adjustable rate mortgages.
Fixed rate Interest:
Irrespective of the future trends in the economy, borrower needs to pay only a fixed monthly installment for certain years to repay this mortgage loan. In general, these mortgage loans are taken for a period of 20 to 30 years. Some lenders even offer 10 year fixed rate mortgagesalso and no need to say that the monthly installments will be high when compared to 20 or 30 year mortgage loans.In this mortgage type, the borrower knows the monthly installment (exactly) he needs to pay and he can plan accordingly. Fixed rate mortgages are very common in USA.
When compared to other mortgage options available, one needs to pay high amount in case of fixed rate mortgage. As the lender can’t change interest rate from time to time, they try to exploit the borrower by keeping interest rate as high as possible.
Adjustable rate mortgages
In this mortgage, the lender has the flexibility to increase/decrease the interest rate but he can’t increase/decrease the interest rate as per his wish and he needs to follow the rules issued by the central bank (Federal Reserve Bank in case of USA). So, the borrower can also opt for adjustable rate mortgages without any doubts as the interest rate can’t be changed to his disadvantage. Adjustable rate mortgage borrowings are commonly seen in (West) European countries.
In this type, the monthly installments is not constant and the amount changes due to liquidity in the economy, financial position of the currency, inflation etc. If the borrower opts for this mortgage loan, he needs to watch each and every financial policy announced by government or banks, as it directly or indirectly changes the interest rate of his mortgage loan.
In some special cases, loan is provided on the already mortgaged property and it is known as second mortgage. In this case, the second mortgage lender only gets paid if money is left after paying the first mortgage.