Mortgage Loan Types
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There are many types of mortgages used here in the United States, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements and sometimes change from state to state.
The two basic types of amortized loans are the fixed rate mortgages (FRM) and adjustable rate mortgages (ARM) (also known as a floating rate or variable rate mortgage). Fixed rate mortgages are typically considered standard here 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 of time and then vary after the end of that period.
In a fixed rate mortgage, the interest rate and periodic payments remain fixed for the life (or term) of the loan. In the United States the term is usually up to 40 years (15 and 30 being the most common). For a fixed rate mortgage payments for principal and interest should not change over the life of the loan. What can change are the property taxes and insurance. These may make your loan go up or down.
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. Common indices in the United States include the Prime rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill Rate"). You can select the mortgage loan you require when interest rates are quite low and get it adjusted throughout the loan term. Often you can get an adjustable rate mortgage that adjust every year, 2 years, 3 years, 5 years and 7 years. Sometimes these loans start out with a low teaser rate and then go up several percentages after the teaser rate times runs out. These type of loans are not as widely in use as they were before the 2007-2010 real estate downturn.
Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve.
Additionally, lenders in many markets rely on credit reports and credit scores derived from them. You can Monitor your FICO Score.The higher the score, the more creditworthy the borrower is assumed to be. Favorable interest rates are offered to buyers with high credit scores. Lower scores indicate higher risk for the lender, and higher rates will generally be charged to reflect the expected higher default rates.
A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term. You may get a loan that is amortized over 30 years but the remaining principle is due in 10 years. This final payment is sometimes referred to as a balloon payment. The interest rate for a balloon loan can be either fixed or floating. The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due. This type of loan is used more widely on commercial property then it is on residential houses.
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