Type of mortgage loan
Several types of mortgage loans are used worldwide, but a number of factors largely identify the characteristics of the mortgage. These factors are:
1. Interest: Interest may be fixed for the life of the loan or variable and change at definite pre-defined periods.
2. Term: Mortgage loans by and large 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.
3. Payment amount and frequency: The amount paid per period and the frequency of payments in some cases may change or the borrower may have the option to increase or decrease the amount paid.
4. Prepayment: Some types of mortgages may limit or put a ceiling on prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.
The types of mortgage loans are as follows:
1. The fixed rate mortgage (FRM) - A fixed-rate mortgage proffers an interest rate that will by no means change over the life of the loan. The most important benefit of this type of mortgage is that if interest rates increase during the term of your loan, the rates stays the same. On the other hand, if interest rates drop during the term of your loan, the rates still stay the same.
2. The adjustable rate mortgage (ARM) - Also known as a floating rate or variable rate mortgage it tenders a fixed initial interest rate with a fixed initial monthly payment. "Initial" is the key word here, because after some preset initial period, the loan is subject to changes in market conditions. The initial interest rate one pays will in all probability be lower than a fixed-rate mortgage but the uncertainty, of course, comes after the initial period.
3. Interest Only Mortgage - An interest-only loan is a loan in which for a predefined term the borrower pays only the interest on the principal balance, with the principal balance being untouched. These loans correspond to a higher risk for lenders, and are therefore subject to a little higher interest rate.
4. Graduated Payment Mortgage (GPM) - A graduated payment mortgage loan, over and over again referred to as GPM, is a mortgage with low initial monthly payments which slowly but surely increase over a specified time frame. These plans are mostly geared towards young men and women who cannot afford large payments now, but can practically expect to do better financially in the future.
5. Balloon Payment Mortgage - A balloon payment mortgage is a mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity. The final payment is called a balloon payment because of its large size. Balloon payment mortgages are more commonly used in commercial real estate than in residential real estate. A balloon payment mortgage may have a fixed or a floating interest rate.
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