A mortgage is a commercial loan in which real property is utilized as collateral in return for a particular loan. In general, the mortgage is secured by the real estate that is being mortgaged. This ensures that the mortgagor’s financial security will not be lost should the property be repossessed. Under normal circumstances, the mortgagor has the option to sell the property and repay the loan early, but this may not always be the case, especially if the market is bad. In this situation, the mortgagor must rely on some sort of insurance policy, called “coupon,” which covers the risk should the property be repossessed. “Coupon” insurance is usually provided by the lender at closing or before the mortgage is closed, and is often given the best deal.
Mortgage loans are available in two types: fixed-rate and variable-rate. A fixed-rate mortgage is one in which borrowers are required to pay the same interest rate for the entire loan period, even if interest rates decrease. The advantage of a fixed-rate mortgage is that borrowers are able to plan their budgets with a known monthly payment amount. In a variable-rate mortgage, borrowers are allowed to make adjustments to the interest rate and the payment due date based on the market.
Fixed-rate mortgages tend to be more reliable than adjustable-rate mortgages. In fixed-rate mortgages, borrowers know what their payment amount will be long-term. Adjustable rate mortgages, meanwhile, are easier to budget for long-term costs. Some adjustable rates mortgages allow borrowers to pay only a portion of the cost of the mortgage in one lump sum, whereas fixed-rate mortgages require borrowers to pay the full amount. Mortgage lenders sometimes offer “teaser” rates, where the borrowers pay slightly less than the rate to be offered, so that they can get a mortgage with a lower initial payment.
Other mortgage types include bridge loans and adjustable rate tracker mortgages. Bridge loans are usually offered to borrowers who have a good credit history and steady employment. These are common types of adjustable rate mortgages, since they allow borrowers to consolidate large amounts of debt into a single loan with a lower interest rate and a longer repayment period. For this reason, they are ideal for those with stable jobs and a relatively low debt-to-income ratio.
Another type of mortgage is mortgage insurance. Mortgage insurance allows homeowners to protect their investments by paying a percentage of mortgage payments in return for premium payments. Mortgage insurance premiums may be paid monthly, semi-annually, or annually. Premiums are based on the risk of loss and the amount of the loan.
Mortgage lenders provide many ways to buy a home. A borrower should shop for the best mortgage rates and terms. There are also other loans available from different lenders, such as home equity loans (also called second mortgages or home equity lines of credit). Mortgage lenders are competitive with one another. Borrowers can compare mortgages online with lenders that offer a complete suite of services.