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Mortgage Cost | MortgageRate |
Mortgage Types | Mortgage Financing
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A
mortgage is a method of using property as
security for the payment of a debt.
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Mortgage Loan Types
There are many types of mortgage
loans. The two basic types of amortized loans are the fixed rate
mortgage (FRM) and adjustable rate mortgage (ARM).
U.S. Historical mortgage rates for a 30-year FRM. In a FRM, the
interest rate, and hence monthly payment, remains fixed for the life
(or term) of the loan. In the U.S., the term is usually for 10, 15,
20, or 30 years. The only increase a consumer might see in their
monthly payments would result from an increase in their property taxes
or insurance rates (paid using an escrow account, if they've opted to
use an escrow).
But payments for principal and
interest will be consistent throughout the life of the loan using an
FRM. |
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In an ARM - Adjustable Rate Mortgage,
the interest rate is fixed for a period of time, after which it will
periodically (annually or monthly) adjust up or down to some market
index. Common indices in the U.S. include the Prime Rate, the London
Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill").
Other indexes like 11th District Cost of Funds Index, COSI, and MTA,
are also available but are less popular. |
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Adjustable rates transfer part of
the interest rate risk from the lender to the borrower, and thus are
widely used where unpredictable interest rates make fixed rate loans
difficult to obtain. Since the risk is transferred, lenders will
usually make the initial interest rate of the ARM's note
anywhere from 0.5% to 2% lower than the average 30-year fixed rate.
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In most scenarios, the savings from an ARM outweigh its risks,
making them an attractive option for people who are planning to keep a
mortgage for ten years or less.
Additionally, lenders rely on credit reports and credit scores derived
from them. The higher the score, the more creditworthy the borrower is
assumed to be. Favorable interest rates are offered to buyers with
high scores. Lower scores indicate higher risk to the lender, and
lenders require higher interest rates in such scenarios to compensate
for increased risk.
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. This payment is sometimes referred to as a "balloon
payment". A balloon loan can be either a Fixed or Adjustable in
terms of the Interest Rate. Many Second Trust mortgages use
this feature.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. A contract could be
written up so there would be more than one "balloon payment" required
to be paid during the life of the loan. |
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