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Mortgages
The modern mortgage market offers a
variety of mortgage loans catering to
the needs of homebuyers. The titles and
details of these plans can become
confusing, especially as new types are
introduced continuously. You can make
sense of these loan types, however, if
you understand the basic principles that
govern all mortgage loans. Again, you
can look to your real estate
professional for assistance.
Basic Principles of all Mortgage
Loans
- The home is used as security to
back up the loan. A lender can force
sale of the home if the borrower
defaults by failing to make
scheduled payments.
- The larger the loan compared to
the value of the home, the more
risky for the lender and, often, the
more expensive the loan will be.
- Interest earned by the lender
always is equal to the periodic
interest rate times the outstanding
principle balance of the loan. The
periodic interest rate is the annual
interest rate divided by the number
of payments in the year (usually one
per month).
- The required payment usually is
a bit larger than the interest due
so that some of the loan principal
is repaid with each payment. This
process is called Amortization and
is why most mortgage loans can be
retired when all the monthly
payments have been made.
All mortgage loans have one of the
following features:
- Fixed payment and fixed interest
rate - fixed rate mortgages
- Fixed rate but variable payment
- graduated payment mortgages
- Variable rate and variable
payment - adjustable rate mortgages
As you learn more about the types of
financing available, you will notice
that some loans appear to have more
favorable terms. That may indicate that
those loans are, indeed, bargains (and
it does pay to shop around), but usually
it means that those loans could have
some feature that is less appealing to
borrowers. For example, shorter-term
loans often have slightly lower interest
rates compared to longer-term loans.
However, the monthly payment for the
same amount of principal may be higher
because of the shorter term. Variable
rate loans usually have much lower
interest rates to compensate for the
risk the borrower accepts that interest
rates will rise in the future.
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