With mortgage loans, borrowers can purchase real estate without the need to pay the full value of the property immediately from their own resources. Mortgages have an interest rate and are scheduled to amortize over a set period of time.
Types of mortgage loans
Mortgage loans are short term as well as long term loans (generally over a period of 10 to 30 years) obtained to purchase properties. It requires a monthly or periodic payment .The principal or original loan amount is gradually paid down by amortization. There are two basic types of amortized mortgage loans.
- Fixed-rate mortgages: In fixed rate mortgages (FRMs), the interest rate and the monthly/periodic payment remain fixed for the entire term of the loan. Borrowers do not have to worry about the changing interest rates. FRMs are generally given for a term of 10 years, 15 years, and 20 years or even for 30 years. This type of mortgage is very affordable when the interest rates are low.During the early amortization period, a large percentage of the monthly payment is paid towards the interest. Fixed-rate mortgages are generally preferred by most due to its fixed interest charges and leveled periodic payments.
- Adjustable-rate mortgages: The interest rates in ARMs are generally fixed for a period of time after which it periodically increases or decreases at preset intervals as per the major market indexes. The rates charged for ARMs are lower in the initial period as compared to the fixed charges for FRMs. The initial period may vary from 1 month to 10 years.
The impact of down payment on mortgage loans
Most lenders require a cash down payment of 5 to 20 percent of the sale price of the property. A higher down payment enables the borrower to apply for a lower loan amount which in turn reduces his monthly payments. Borrowers may even obtain a private mortgage insurance incase they fall short on the down payment.
Lenders scrutinize the credit report of the borrower to determine the amount of the loan. A good credit score helps to qualify for a mortgage loan with an affordable rate of interest.