Some Types Of Mortgage Home Loans And Some Details About Each
Fixed Rate Mortgage (FRM): Here a Fixed Rate Mortgage type of loan, a fixed interest rate is charged on the borrowed amount and the monthly installments are calculated accordingly for the entire term. The monthly installment will therefore be same for the 1st and the 30th installment in case of a 30-year loan term. Adjustable Rate Mortgage (ARM) (also known as a Floating Rate or Variable Rate Mortgage): In an Adjustable Rate Mortgage the rate of interest varies according to the market and may increase or decrease depending on the market. Thus while the borrower has a chance of getting the benefit if the interest rates decrease at some times, he also faces the risk of increase in market rates. Thus a part of the interest rate risk is transferred from the lender to the borrower but for this the borrower benefits with the initial interest rate, which may be from 0.5% to 2% lower than the average 30-year fixed rate. Negative amortization loan: This type of loan is considered when the borrower can pay less than the total amount of interest payable every month. The monthly installment does not completely cover the amount of interest due for that month. Here the unpaid interest is added to the principal amount. This helps when the borrower can pay less amount of monthly installment than that he should actually pay covering the principal and the interest amount. Repayment mortgage: In this type of mortgage, the monthly installment includes a part of the total loan amount borrowed and a part of the interest amount. The statement for this type of loan will hence show the break down in amount of capital repaid and the amount of interest. In this type of loan, the complete loan amount with the interest is repaid at the end of the term. However, the initial installments will consist of a larger amount of the interest part than the capital amount. The part of the capital amount will grow larger over the years and gets maximum at the end of the term. Participation mortgage: This type of mortgage is considered when the property is bought for renting or selling off. Here the lender shares a part of the rent or profit (if property is sold). The borrower should pay the lender the principle, interest and a part of his earnings on the property. This involves the participation of the lender, hence the name. Package loan: This type of loan is used where the borrower wishes to seek the loan for buying the home as well as furnishing it with home accessories. Equity loan: When a person owns a home without and lien on it, he may mortgage the home and get cash. Here the lender places a lien on the title of the home. This is called Equity loan. In such loans the rate of interest applied is much lower than that applied to unsecured loans, such as credit card debt. Buy down mortgage: Here the seller of the home is expected to provide an amount to the lending institution and in return the buyer gets lower interest rates for some initial years. The seller may raise the purchase price in order to meet the costs of the buy down. Not preferred generally, this method may be used in some special types of mortgages. This type of loan can be considered in case of refinance. Balloon mortgage: Here the monthly installment is less than it would actually be for a given term, thus leaving a bigger balance amount at the end of the term. The final payment would naturally be large in amount and hence called as the balloon payment. Lifetime mortgages or reverse mortgages: In some countries, for borrowers who borrow at a later stage in life, may be at retirement, a loan can be obtained on the home to generate a fixed monthly income for the borrower. A fixed amount is paid to the borrower to take care of his expenditure and this amount is added to the capital throughout the term till the borrower lives. The mortgage amount with interest is recovered by selling the property after the death of the borrower.
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