Study Different Home Mortgage Types Before Selecting One

A mortgage is a popular type of loan taken by people all over the world to fund purchase of different items like a property, vehicle etc. When a person pledges his property as security and takes a loan to pay off the outstanding cost of the property, then he is said to have taken a home mortgage. A home mortgage is taken usually for 30 years although it is possible to pay off the loan earlier. The idea in lenders offering a home mortgage is that if the borrower defaults on payments over a certain period, the lender can take over the property.

The basic components of a mortgage are:

• Property
• Mortgage
• Borrower
• Lender
• Principal
• Interest
• Foreclosure

The property is the physical residence that the borrower is using to get a home mortgage. The mortgage is the restrictions the lender will place on the property preventing the disposal of it by the borrower while it is under a mortgage. Some of the restrictions are the need to purchase mortgage and home insurance or even pay off existing mortgage before disposing the property.

The borrower is the one who owns the property and is taking a home mortgage on it. The lender can be a financial institution or a bank who will give a loan to the borrower based on certain terms and conditions. The principal is the amount of the loan taken by the borrower, which will not include the initial down payment he makes. The interest is the charge on the loan and is fixed based on market trends and other economic factors. If a borrower defaults on his payments or due to other circumstances, the lender can repossess or foreclose and seize the property.

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Once the property is seized, the lender can dispose it and use the money to cover the outstanding debt still owed to him. The two most common types of home mortgages are fixed rate mortgage (FRM) and adjustable rate mortgage (ARM). As the name suggests, with FRM the interest rate will remain the same throughout the term of the mortgage. The borrower can easily predict how much he has to pay each month and set aside that money. FRM does not take advantage of fluctuating rates of interest.

With ARM, the rate of interest can be adjusted after a certain term depending on the market index. This is a gamble the borrower takes for if the rate of interest is low, he can save money while if it goes very high, he can actually lose a lot. Another popular type of mortgage is the balloon mortgage. As per this type of mortgage, the borrower will pay small periodic payments initially for a number of years while promising to pay a large lump sum after a fixed time.

A borrower can opt for a balloon mortgage if he plans on refinancing his property or hopes to get a cash windfall – eg inheritance, expected dividend or a tax refund – sometime in the future. He can use this money to repay the existing mortgage therefore saving initially by making smaller payments. There are several merits and demerits of going for a balloon mortgage. Studying them in detail will help a borrower make the right decision. Always remember to use a mortgage calculator to estimate the rates of whatever the type of mortgage you plan to take.

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A mortgage calculator will give you exactly how much you need to pay each month during the period of a mortgage. Apart from this, there are mortgage calculators to help estimate if a property is affordable, whether refinance is a good option and so on. A balloon mortgage requires lesser down payment than a conventional mortgage. It often comes with lower interest payments and offers greater flexibility to the borrower since a borrower can convert to a regular mortgage if the cash windfall he is expecting is not forthcoming. Ensure all these terms and conditions with the lender before opting for a balloon mortgage.

The major disadvantage with a balloon mortgage is that the final payment will be extremely large. The borrower must be absolutely certain he will have that amount coming to him in the future before going in for this mortgage. A balloon mortgage is not a good option if you plan on refinancing for then the interest costs could be high. So, check on various variables of this and other home mortgages seeking advice from an expert before deciding on which option to choose.