Mortgages

The word mortgage comes from the Ancient French word morgage which means literally “death-pledge.” It is a form of debt that is secured by the borrower’s real estate property and usually is for the acquisition of the real estate property that the mortgage is being placed on. This allows the borrower to buy real estate without having to pay its entire value up-front. There happen to be many different types of mortgages including but not limited to: Fixed Rate Mortgages, Adjustable Rate Mortgages, Balloon Mortgages, FHA Mortgages, and Shared Appreciation Mortgages.

Fixed Rate Mortgages, as the title implies, have a fixed interest rate that will simply not change for the entire duration of the loan. The monthly payments are usually, but not always, a fixed amount as well. With an FRM the principal payment rises with each payment; the first payments are mostly interest, but with each payment the principal is a bit larger and the interest is a bit smaller. FRMs have different terms and usually last for 10 to 40 years.

With an Adjustable Rate Mortgages the interest rate can go up or down in accordance with the market at pre-designated intervals. The payments are determined by indexes such as Treasury Bills or the average national mortgage rate. The general appeal of these mortgages is that they often start with a very low interest rate that gradually rises over time. The unpredictability of these loans has lead many to criticize them for preying on young homeowners who don’t know any better.

Balloon Mortgages mature before the principal and interest have been paid off and the remainder is due in one large lump sum. They can be divided into two different kinds: Interest-only and Rollover. In an Interest-only loan, payments cover only the interest. The Rollover Mortgage is small term and must be refinanced at the end of the 3-5 year term. The Balloon Mortgages provide brilliant protection against future interest rate hikes, but its small term nature and strict payment plot may make it a bit too risky.

An FHA Mortgage loan is federally insured by Federal Housing Administration. This gives lenders protection in case the borrowers default on their loan. It all started in the Fantastic Depression when banks were refusing to give people mortgages and continues to operate today as a way for those with less than ideal credit to get mortgages. This type of loan requires the borrower to pay monthly mortgage insurance for 5 years or until the loan is paid down to 78%.

Finally, a Share Appreciation Mortgage is a loan where the borrower receives a low below market rate of interest, but must share part of the appreciation of property value with the lender for a number of years. At the end of this term, the borrower must pay the lender its share of the appreciation in cash, even if it means selling the property in order to come up with it. It’s a risk for the lender as well as the property can always decrease in value.



By: Usha Pradhan

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