Mortgage loan is the common term for a loan secured by a mortgage on real property. The "mortgage" refers to the legal security, but the terms are often used interchangeably to refer to the mortgage loan. Mortgage loans generally refer to a loan secured by residential property, often for the purpose of acquiring the residence. As the value of the property reduces risk for the lender, Mortgage loans may be lower priced than other forms of borrowing.
Many countries use Mortgage lending as the primary mechanism to finance private ownership of residential property. The basic components tend to be similar although the terminology and precise forms will differ from country to country.
Borrower: the person borrowing who either has or is creating an ownership interest in the property. Lender: any lender. It is usually a bank or other financial institution. Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size. Interest: a financial charge for use of the lender's money. Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is arguably no different from any other type of loan.
Mortgage loan basics
Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. Depending on local conditions, the most basic arrangement would require a fixed monthly payment over a period of ten to thirty years. The original loan would be slowly paid down over this period through amortization. In practice, many variants are possible and common worldwide and within each country.
Lenders offers loans against property to earn interest income. They generally borrow these funds themselves either by taking deposits or issuing bonds. The cost of borrowing is affected by the price at which the lenders borrow money.
The perceived peril of the mortgage loan is also taken into account in Mortgage lending. The lender will be able to foreclose and recoup some or all of its original capital if the funds are not repaid.
Mortgage loan types
Mortgages are of many types that are used worldwide, but the characteristics of the mortgage can be broady defined by several factors. All of these may be subject to local regulation and legal requirements.
Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.
Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.
Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.
Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.
The fixed rate mortgage (FRM) and adjustable rate mortgage (ARM) also known as floating rate mortgage are two basic types of amortized loans.Floating rate mortgages are the norm and will simply be referred to as mortgages in many countries.The fixed rate mortgages are typically considered "standard." in the United States .Combinations of fixed and floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period.
In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index.
Lenders in many markets rely on credit reports and credit scores derived from them. The borrower is assumed more creditworthy having higher score. Favorable interest rates are offered to buyers with high scores. Lower scores indicate higher risk for the lender, and higher rates will generally be charged to reflect the (expected) higher default rates.
Lenders usually require that the borrower make a downpayment, that is, contribute a portion of the cost of the property while making a mortgage loan for purchase of a property. This downpayment may be expressed as a portion of the value of the property.
A mortgage loan can be repaid in various ways. Repayment depends on locality, tax laws and prevailing culture.
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