A Mortgage is a legal agreement that conveys conditional right of ownership of an asset or property by its owner to a lender as security for a loan. Mortgage is also known as lien against property or claims on property. It is a debt instrument which is secured by the collateral of specified real estate property that the borrower is expected to payback with a predefined set of payments. Large real estate purchases are carried on by individuals and businesses by mortgaging wherein they do not pay the entire value of the purchase up front. Over the period of time, the borrower repays the principle amount as well the interest until the property is finally cleared of the loan. In case the borrower is unable to pay the mortgaged amount, the bank reserves the right to foreclose the deal.
Mortgages are of various kinds. Some common kinds of mortgage are:
Residential Mortgage A home owner pledged his house to the bank. The bank holds the right to claim the house if the buyer of the hose defaults on paying the mortgage. In case of afore closure, the bank can evict the tenants and sell off the house. They can thereon use the income from the sale to clear the debt.
Fixed rate mortgage or traditional mortgage The borrower pays the same interest rate for the life of a loan. The monthly principle and interest payment do not change from the first to the last payment, they remain static. Most fixed rate mortgages are for a term of 15-30 years and assure the borrower the same payment even if the interest rates in the market rise. If the interest rates on the market drop, the borrower can secure a lower rate by refinancing the mortgage.
Adjustable rate mortgage The interest rate is fixed for an initial term, but fluctuates with market interest rates. The initial interest rate is often below the market rate that makes the mortgage seem more affordable. If interest increases later, the borrower may not be able to afford the higher monthly payments. Interest rates usually decrease making ARM less expensive. The monthly payments in either of the cases are unpredictable after the initial term.
Other types of mortgages include interest only mortgages, payment option ARMs that are best suited for sophisticated borrowers.
Financial education is so important, but barely taught at all in our schools. Having resources online is great, but not if they are inaccessible to so many. Thanks 508!