The term 'Mortgage' is included in the Banking edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Mortgages are loans made on commercial or residential properties. They commonly use the house or the property itself as collateral. These mortgages are paid off in monthly installments over the course of a pre determined amount of time. Mortgages commonly come in fifteen, twenty, and thirty year periods, though both longer ones and shorter ones are available.
A variety of differing mortgages exist. All of them have their own terms and conditions that translate into advantages and disadvantages. Among the various mortgage types are fixed rate mortgages, adjustable rate mortgages, and balloon payment mortgages.
The most common kinds or mortgages, especially for first time home buyers, prove to be fixed rate mortgages. This is the case because they are both simple to understand and extremely stable. With such a mortgage, the regular monthly payments will be the same during the entire life of the loan. This makes them very predictable and manageable. Fixed rate mortgages have the advantages of protection against inflation, since the interest rate is locked in and can not go up with the floating interest rates. They allow for longer term planning. They come with very low risk, since you are always aware of both the payment and interest rate.
Adjustable rate mortgages, also known as ARM’s, have become more popular since they begin with lower, more manageable interest rates that result in a lower initial monthly payment. The downside to them is that the interest rate can and likely will go up and down in the loan’s life time. Factors to consider with ARM’s are the adjustment periods, the indexes and margins, and the caps ceilings, and floors. The adjustment period is the one in which the interest rate is allowed to reset, commonly starting anywhere from six months to ten years after the mortgage begins.
The interest rates change based on the index and margin. The interest rates are actually based on an index that is published, whether it is the London Interbank Offered Rate, or LIBOR, or the U.S. Constant Maturity Treasury, or CMT. The margin is added to this index to determine the total new interest rate on your mortgage. The amount that these ARM rates are capable of going up or down in a single adjustment period and for the life of the loan is called a cap, a ceiling or a floor.
The third common type of mortgages is balloon reset mortgages. They come with thirty year schedules for repayment, with a caveat. Unless you pay are willing to allow the mortgage to reset to then current interest rates at the end of either a five year or seven year term, then your entire balance will be due at this point. This gives you the benefits of the low monthly payment plan as a person with a thirty year loan would have, yet you will have to be willing to pay off the whole mortgage if you do not take the reset option when the term is up. Because of this, many people refer to this type of a mortgage as a two step mortgage.