Mortgage loans
There are several generic terminologies associated with the mortgage loan and they are also available in several types of which two types are generally referred to and used.
The loans are available under various titles and types like credit loan, home loans and home equity loans that have different loan rates. Home equity loan are also known as the mortgage loans that have varying loan rate depending on their type and are generally quoted as US rates. New mortgage loans or Mortgage home loan are gaining popularity among people day by day. Let us look at the details of this type of equity loans.
What are mortgage loans?
Mortgage loans are the type of loan in which the borrower pledges some real estate or immovable property for the loan. The lender has a lien on the property being pledged such that that the lender can sell off the property to recover the loan in the case of borrower’s default. Mortgage loan have interest that is amortize over a predefined period of time, generally thirty years. All types of real estate property can be pledged in order to get a loan under mortgage and an interest rate is charged on the loan that is reflective of the lender’s risk. Mortgage loans are very common all over the globe and they are excessively used for financing the private residential property. People generally pledge the house they intend to acquire for their residence for getting the home loan.
Important terminologies associated with mortgage loan:
Mortgage loans have several associated terminologies that make the understanding of mortgage loan clear and comprehensible, although, these terminologies differ from country to country, but certain terms are used generically or at least understandable by people all over the world. Some of these terminologies are listed as follows:
- Property – Property is referred to the real estate or residence that is financed from the loan.
- Borrower – Borrower is the person who borrows money so as to gain ownership interest in the property being pledged.
- Lender – Lender is person who takes risk by giving loan to the borrower at a price referred to as interest.
- Principal – Principal is the original amount of loan that is paid back at the end of the tenure of the mortgage. Principal is the amount on which interest or cost of loan is charged.
- Interest – Interest is the cost of using the loan amount provided by the lender and is required to be paid by the borrower.
- Foreclosure – Foreclosure, also known as repossession, is the possibility that the lender will take the possession of property in case the borrower defaults on the loan and will sell it off to recover the amount of loan. This is the only feature of mortgage loan that set it apart from other types of loans.
There are many other terms that are used commonly in many markets, but the terminologies discussed above are most commonly used by people all over the world.
Role of government in regulating mortgage loans:
Government regulate mortgage loan market in several ways that are broadly categorized into three categorized, discussed as follows:
- Direct government influence through proper legal requirements and regulations.
- Indirect government influence through the regulation of the related entities like financial market or its participants (banking industry etc.)
- State intervention is also a type of government regulation executed in the form of direct government lending through the banks owned by the state or through the sponsorship of different departments.
Types of mortgage loans:
Mortgage loans are of various types, the factors that determine the loan type are given as follows:
- Interest – Interest on the mortgage loan can be fixed as well as variable for the tenure of the loan, the interest rate can be higher or lower for different loan types and can also change after a certain time period.
- Term – the time period after which the loan will be repaid is specified at the time of initiation of the loan and generally referred in unit of years. Some loan amounts are amortized, while other requires lump sum payment at the loan maturity. Some loans also have negative amortization.
- Periodic payments - The amount and frequency of periodic payments also determine the type of mortgage loan. The periodic payments may include both the principal and interest or only interest payments that may also change under variable interest rate scheme.
- Prepayment of loan – Some loans allow the prepayment of loan, or may even demand prepayment of loans, but certain types of loans impose penalty for prepayment.
The two important types of loans are fixed rate mortgage loans and floating rate mortgage loan (also known as adjustable loan mortgage loan). In some countries, floating rate mortgages are the standard and the generic term mortgages refer to these adjustable rate mortgages, however, things are different in United States where the standard is the fixed rate mortgages. The details of the two types of mortgages are given as follows:
- Fixed rate mortgages – Fixed rate mortgages have the interest rate and periodic payments that do not change during the life of the mortgage, the payment of principal and interest remain unchanged, and however, the ancillary costs may vary.
- Variable rate mortgages- The adjustable rate mortgages, the interest rate remains unchanged for a certain period of time after which, the interest varies with some index that can be prime rate offered by the bank, London Interbank Offer Rate (LIBOR) or the treasury bill rate.
Apart from these generic types, the interest rate charged by the mortgage holder to the mortgagor depends upon the risk assumed by the mortgage holder. If the lender assumers more risk of bad credit, the interest rate charges is higher and the interest rate is lower when the risk assumed by lender is lower due to good credit history of borrower.
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