5 Must-Know Types of Mortgage Loans

Mortgage loans are loans taken from banks, online brokers or independent mortgage brokers by pledging property owned for purchasing a residential or commercial property or to refinance a loan. Mortgage loans are usually for a 15 or 30 year period. Mortgage payments are evened out according to the number of years, the rate of interest and the type of mortgage. The property purchased is used as security or collateral to obtain the debt. If the borrower of the loan defaults on the mortgage payments the lender has the right to sell the property by employing the foreclosure process.

To be eligible for a particular loan the lender examines the employment and income generation of an individual or family to assess that monthly payment can be paid regularly by the borrower. The three important aspects that are taken into consideration to qualify for a loan are Credit Score, Monthly Income and Down Payment. Credit scores indicate the risk of offering a loan to a borrower. Higher the score lowers the risk. Good credit scores also ensure reasonable terms of the loan and a lower rate of interest. Monthly income is evaluated to ensure expenses are not more than income. The amount paid as down payment reduces the risk of the lender to cover the full expense of the loan in case of default in payments.

There are different types of mortgage loans available to suit the requirements of different borrowers. Here are the following:

  • Fixed Rate Mortgages are among the most popular mortgage products which are not influenced by interest rate rise or falls. The interest rates are locked, and payments remain the same despite rising or fall in interest rates. Fixed rate mortgages are most popular when interest rates decline.
  • Adjustable rate mortgages provide a fixed rate of interest for a specific period and thereafter resorts to an adjustable rate of interest. It fluctuates according to market interest rate changes after the fixed rate period is complete.
  • Balloon Mortgage allows borrowers a lower rate and monthly payments for a period. Such a period lasts for three to ten years. After the completion of the term the borrower is required to pay the principal balance as a lump sum amount. If applicable and possible the balloon mortgage can also be converted to a fixed rate or adjustable rate loan.
  • Home Equity Line of Credit is variable rate mortgages in line with the prime rate. You are allowed to take a credit up to your credit limit which is the maximum amount one can borrow under any plan. The interest payments are tax deductible and one can also pay the previous mortgage by taking a percentage of the appraised value of the home such that the loan amount covers your previous loan balance and your current fund requirements.
  • The Interest-Only Mortgage requires only interest payments to be paid for a specific period of time following which the terms of the loan change and a new mortgage amount is derived. This new mortgage will be paid with principal plus interest payments for the remaining number of years.

Some online lenders offer the lowest interest rate in the market so choose mortgage interest rate or mortgage refinancing options that best match your situation while saving time and money.

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