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.
- 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
Friends and family may give you the name of a friend who is a Mortgage Broker. It is important to work with a Mortgage Broker who has a good reputation for offering the best rates and closing loans on time. Your real estate agent is a good source for a referral because they have experience working with Mortgage Brokers on every financed transaction.