What is a Mortgage? - 3 minutes read
The term mortgage refers to a loan given by the mortgage lender or bank - which allows an individual to purchase the property or house. Although it is possible to obtain loans to cover the entire cost of a new home, it's more common to secure a loan amounting to approximately 80% of the property's value.
The loan has to be paid overtime. The home purchased acts as collateral to the amount an individual borrows to purchase the home.
Fixed-Rate Mortgages
Fixed-rate mortgages allow borrowers to pay an established interest rate over the course of 15, 20, to 30 or more years. With a fixed rate the shorter the duration over which the borrower pays more, the greater the monthly amount. The longer, however, the borrower takes to pay, the smaller the monthly amount to repay. But the longer it takes to pay back the loan the greater amount the borrower will ultimately pay in interest charges.
The most significant benefit of the fixed-rate loan is the fact that the borrowers can count on the monthly mortgage payment to be the same each month throughout the duration of their mortgage. This makes it easier to plan budgets for the household and avoid unexpected additional charges from one month to the next. Even if rates rise substantially, the borrower won't have to pay higher monthly payments.
Adjustable-Rate Mortgages
Variable-rate mortgages (ARMs) come with the possibility of having interest rates that may be - and often do fluctuate over the duration of the loan. Market rates rise and other factors cause interest rates to fluctuate, which affects the amount the borrower pays, and, consequently, the number of monthly payments due. When a mortgage is adjustable, the interest rate will be monitored and adjusted at specified intervals. For instance that the rate can be adjusted annually or at least once every six months.
One of the most well-known adjustable-rate mortgages is the 5/1 ARM, which offers a fixed rate for the initial five years after the start of repayment, and the rate for the remaining time of the loan's duration is subject to change every year.
Although ARMs make it more difficult for the borrower to assess spending and establish their budgets for the month, they are well-liked because they usually come with lower starting rates of interest than fixed-rate mortgages. People who believe that their income will grow over time may seek an ARM to lock in a low fixed rate early and when they are earning less.
Written By: Joyce Roberts
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