A mortgage is a type of loan which is taken out to purchase a property or any valuable asset. When you take out a mortgage loan, you have to keep anything as collateral against the loan amount. This type of loan is usually taken out from a bank or any other financial organization. In case of a residential mortgage loan, the home-buyer has to keep his/her house as security against the loan amount to the bank. The bank has every right to foreclose his/her house in case the borrower makes any default in paying off the mortgage loan.
Read on to know 4 types of mortgages.
1. Fixed rate mortgage – Fixed rate mortgage or FRM is a type of loan in which the interest rate and the monthly payment remains the same throughout the term of the loan period. The term period of this loan is usually 15 to 30 years. The benefit of this type of mortgage is that even though the interest rate increases, the mortgage payment won’t get affected. This is the most common type of mortgage for the first-time home buyers.
2. Adjustable rate mortgage – Adjustable rate mortgage or ARM is a type of loan where the interest rate and the monthly payment may be low at the initial stage but it may rise or fall with the change in the market interest rates. Most ARMs have usually low interest rate at the initial stage which attracts most of the first-time home buyers to opt for it. In this type of home loan, the borrower may have to pay increased mortgage payment in future if the market interest rate increases. Before approving your loan, the bank checks your credit history and income. If your credit score is not good, you may not get fixed rate mortgage but you will get adjustable rate mortgage.
3. Interest-only mortgage – This type of mortgage is beneficial for those people who earn income on the basis of commission. In this type of loan, the borrower has to pay only the interest on the loan for a specific time period. This type of loan is helpful for the home-owners who plan to take out a bigger residential loan but find it difficult to make high monthly payments for a certain time period.
4. Balloon mortgage – You have to make a low monthly payment for a number of years in case of a balloon mortgage. After your loan repayment period comes to an end, a part of the principal amount remains which you need to pay off in a lump sun payment altogether. This means that you either need to pay the principal amount or you have to refinance your current loan.
When you find it difficult to manage money on your own for purchasing house/property, you may take out a mortgage loan. This will help you get cash in hand immediately for the house/property you want to purchase. However, you should also remember that you have to repay this loan amount within a specific time period. So, it is advisable that you should take out such a mortgage loan which will suit your financial condition and, at the same time, you will be able to pay off the mortgage loan relatively fast.
Author Bio – Samantha Taylor is the Community Mentor of MortgageFit and has been contributing her suggestions to the Community since 2005. Not just that, she has also made notable contributions through the various articles written on different subjects related to the mortgage industry. Few of her popular articles would include names like ‘Mortgage that you can afford’, ‘Mobile Home Loan with Bad Credit’, and How much mortgage can I borrow?’
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