A mortgage loan or a mortgage is a tool that is used to create a borrowing power (lien) on a real estate property by contract. Furthermore, it is a means by which individuals or corporate bodies can buy buildings either residential or commercial property without having to pay for the whole value of the property before accessing it.
In addition, there are different types of mortgages; the type of mortgage an individual or business would decide to go for differs. And it is as such, based on the needs and the capabilities of the individual or businesses. In business terms, the borrower is known as the mortgagor while the lender is called the mortgagee.
As stated earlier, there are many types of mortgage loans all over the world, however, there are many factors that determine the feature of each mortgage. The features are determined by regulations in each country and the legal demands.
3 types of mortgages:
1.THE FIXED RATE MORTGAGES:
In fixed-rate mortgages, you get to pay a fixed and unchanging rate of interest up until you finish the mortgage. Unlike some other types of mortgage, the fixed-rate’s mortgage is fixed and it usually comes to about 15, 20, 30 years.
Advantages of a fixed-rate mortgage:
- The major advantage is the fact that the amount you have to pay is fixed! It is not going to change with any review based on any factor.
- In addition, a fixed-rate mortgage also allows you to be able to budget for other spending. This is because of the fixed payable amount. You get to know how much you pay monthly and as such you have a well-detailed budget.
- Furthermore, a fixed-rate mortgage also allows the borrower to refund over a long period of time. Most fixed-rate mortgages are usually calculated based on 15, 20, and 30 years. This, however, gives the borrower enough time to pay and as such he can attend to other financial needs while paying his mortgage.
2.ADJUSTABLE-RATE MORTGAGES (ARM):
In contrast with the fixed-rate mortgage, the adjustable-rate mortgage has a fluctuating interest rate that could go up or down depending on the market conditions. In addition, as a borrower under the adjustable-rate mortgage, it is your duty to understand the period for which the interest rate of your mortgage would increase as some increase annually while others do increase on a monthly basis.
Furthermore, in an adjustable-rate mortgage, the bulk of the interest rate risk has been transferred from the lender to the borrower and that is why as a borrower, it is important to understand the agreements before signing the necessary documents.
Advantages of an adjustable-rate mortgage:
- One of the major advantages of an adjustable-rate mortgage is that as a borrower, you get to pay a reduced interest rate in the first few months or years of your homeownership.
- Another added advantage of an adjustable-rate mortgage is that you get to save a substantial amount of money on interest payment.
Disadvantages of an adjustable-rate mortgage:
- The borrower might not be able to pay owing to changes in the interest rate if the review of interest rate goes beyond his capabilities as a homeowner.
- Also, in an adjustable-rate mortgage, the bulk of the interest rate risk has been shifted to the borrower.
- Furthermore, in the adjustable-rate mortgage, if the value of the home drops, it makes it difficult for the homeowner to re-sell or refurbish before the completion of the loan.
3.GOVERNMENT INSURED MORTGAGES:
The U.S government has created three agencies for its citizens in order to assist them to become homeowners. These agencies are
- The Federal housing administration (FHA LOANS)
- The U.S Department of Agriculture (USDA LOANS)
- The U.S department of veterans affairs (VA LOANS)
ADVANTAGES OF GOVERNMENT INSURED MORTGAGES:
- An advantage of government-insured mortgages is that the credit requirements are very relaxed so that an average citizen could benefit from it
- The down payment required to qualify for this type of mortgage loan is very low
DISADVANTAGES OF GOVERNMENT INSURED MORTGAGES:
- The documentation required for this type of loan is quite much as the government requires a lot of details from would-be borrowers
- The overall borrowing cost is relatively higher
