Mortgage Loan Types

mortgage_loan-types Mortgage loans differ from state to state and country to country but a few factors are usually common to all of them.

  • Term – usually represents the amount of time (calculated in years) in which you must repay the loan.
  • Interest – can change according to an international indicator or can be fixed for the whole period.
  • Prepayment – in some cases there may be restrictions for prepayments.
  • Frequency and payment amount – the amount of money you must pay to the borrower and how often. Example: $400 each month.

Amortized loans can be FRM – fixed rate mortgages or ARM – adjustable rate mortgages. The last ones are know as variable rate mortgage or floating rate mortgage and are the standard type of mortgages in most countries except US. In US FRM are the standard ones.

In ARM the interest rate is fixed only for a certain period of time, after which it will be adjusted periodically (monthly, biannually or annually) based on some index such as LIBOR – London Interbank Offered Rate, U.S. Prime rate, T-Bill – Treasury Index and others.

FRM have fixed interest rates for the entire period and thus the payment is always the same. This helps the borrower to better administrate its money because he will always know exactly how much he has to pay monthly.

The Term can be between 10 and 30 years, even more in some countries (such as US), but only in certain circumstances.

Adjustable rates are widely used because fixed rates are quite impossible to obtain, if you borrow money for more than 10 or 15 years, and transfer the risk of the interest rate to you, the borrower. This risk depends both on interest and credit risk and will affect directly the interest rate you will have to pay for the loan.

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