Types of Mortgage Loans
Types of Mortgage Loans
Mortgages are often called ” liens on property” or “assignments of trust.” If the tenant or homeowner stops making payments on the mortgage, then the lender is able to foreclose. They are basically a type of unsecured financial claim. In a residential mortgage, usually a homeowner or a homebuyer promises to pay back the mortgage to the lender or other third party, who has a legal claim on the property. If the owner defaults, the lending entity has the option of either holding onto the property until the payoff is made, selling the property, or taking possession of it through a process called foreclosure.
There are three different types of mortgage loans available from lenders. They include fixed-rate loans, interest-only loans, and balloon-payment mortgages. Most mortgage companies issue a variety of different kinds of loan products, but not all of them use the same terminology or have the same rules for qualification. Here’s a look at the three major types:
Fixed-rate mortgages are designed to protect the lender by requiring the borrowers to pay back the mortgage in an exact amount over the term of the loan. Borrowers can choose to receive either a lump sum, fixed interest rate, or a line of credit. For borrowers with little or bad credit, this can be a great option because the mortgage can be the only source of collateral for a large real estate property. However, borrowers must realize that if they fail to pay the mortgage after the specified time frame, they face losing the property. This is a great option for homeowners who want to purchase property without putting too much money down.
An interest only mortgage is a loan where the borrower makes payments on the mortgage in case interest rates or loan payments go down during the term of the loan. It is a more flexible option than a fixed-rate mortgage where the borrower makes payments every month. Interest only loans often have variable-rate loans that are subject to change based on current market interest rates. If the loan terms are modified, it will also affect the repayment amount.
Balloon-payment mortgages are mortgage loans that reset higher each year, oftentimes increasing by one percent. A balloon-payment mortgage has higher interest rates, so it is wise to budget for higher payments at the start of the loan. This option can help homeowners repay their mortgages faster.
Mortgage loans can also be referred to as home equity loans. Home equity loans can be used for a number of different purposes including repairing or improving homes, paying off credit cards, or building a new home. If you are thinking about obtaining a mortgage loan, it is wise to talk with a financial expert. They will be able to provide you with an informed decision based on your unique situation. Although you want to get the best loan possible, it is important to understand how much you can afford to pay on a monthly basis.