The modern mortgage market offers a variety of mortgage loans catering to the needs of home buyers. The titles and
details of these plans can become confusing, especially as new types are introduced continuously. You can make
sense of these loan types, however, if you understand the basic principles that govern all mortgage loans. Again, you
can look to your real estate professional for assistance.
Basic Principles of all Mortgage Loans
The home is used as security to back up the loan. A lender can force sale of the home if the borrower defaults by failing to make scheduled
The larger the loan compared to the value of the home, the more risky for the lender and, often, the more expensive the loan will be.
Interest earned by the lender always is equal to the periodic interest rate times the outstanding principle balance of the loan. The periodic
interest rate is the annual interest rate divided by the number of payments in the year (usually one per month).
The required payment usually is a bit larger than the interest due so that some of the loan principal is repaid with each payment. This
process is called Amortization and is why most mortgage loans can be retired when all the monthly payments have been made.
All mortgage loans have one of the following features:
Fixed payment and fixed interest rate - fixed rate mortgages
Fixed rate but variable payment - graduated payment mortgages
Variable rate and variable payment - adjustable rate mortgages
As you learn more about the types of financing available, you will notice that some loans appear to have more favorable terms. That may
indicate that those loans are, indeed, bargains (and it does pay to shop around), but usually it means that those loans could have some feature
that is less appealing to borrowers. For example, shorter-term loans often have slightly lower interest rates compared to longer-term loans.
However, the monthly payment for the same amount of principal may be higher because of the shorter term. Variable rate loans usually have
much lower interest rates to compensate for the risk the borrower accepts that interest rates will rise in the future.
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