Mortgage 101
4 August, 2020 / Articles
A mortgage also known as a lien is a debt instrument usually secured against a collateral of a real estate nature. Payments made to offset mortgages are usually predetermined. Failure to commit to payment usually leads to the foreclosure. One common mortgage type is a residential mortgage, where a house is pledged to the bank by the person who accesses a mortgage. In that case, the bank retains claim over the premise should there be a payment default.
Foreclosures, occur and are caused by broken promises to pay, in that case, the banks get a claim to the house. The bank is thus allowed to evict the tenants and sell the house to a willing buyer. The mortgage debt is then cleared with the proceeds obtained from the sale of the house. Mortgages differ in form and nature and one has concession over which one selects.
The fixed rate mortgage also referred to as a traditional mortgage, is an interesting mortgage, since the borrower pays the same rate of interest for the entire life of the loan. This that the interest, as well as the initial principal payments on a periodic basis, never change spanning from the first mortgage payment up till the last payment is made. The catch with a fixed rate mortgage is that it usually spans periods ranging between 15 to 30 years. The most interesting bit about fixed rate mortgages is that where there is an appreciation in market interest rates it could be because of changes in economic conditions, the terms of engagement do not change and thus the borrower is bound by the initial terms of the agreement, hence, makes the payments made do not fluctuate. However, in scenarios where interest rates decline the borrower is given an option to refinance the mortgage.
Another mortgage type is the adjustable rate mortgage the ARM. For the ARM interests are fixed for an initial period but fluctuates or changes with the operating market interest rates. For The ARM, initial or preliminary interest rates often fall below market rates. This makes the mortgage appear more pleasant and appears more affordable than it really is. A later increase in interest rates could make the borrower unable to offset the loan. However, though rare, interest rates could decline to make the ARM less costly; regardless of the monthly payments fail to behave predictably.
Other less common mortgage types are the payment option ARM and interest only mortgages. This is usually used by sophisticated borrowers. All in all, when shopping for mortgages, one needs to consult and have an indication of the likely impact of the mortgage.
