What is a Mortgage?

Mortgage constitutes using property as security against loans. Under most jurisdictions mortgages are against immovable property such as real estate as against other property like vehicles. Mortgage is the means by which business and enterprises can purchase property without having to pay the full amount at one time.

MortgageMortgage types vary from short 6-month term to 5-year mortgages with variable interest rates. In mortgaging, the interest of immovable property is transferred to the creditor with very specific description and should be identifiable. Anyone, except a minor or those with unsound mind, can create a mortgage.

Mortgaging is a legally binding contract and gives the lender a right to acquire and sell the property of the borrower in case he defaults in repayment.

Long-term mortgages: Long-term mortgage with smaller monthly payment schemes are meant for those who cannot afford large payments now but will be able to do so later in life. Such loans attract compounding of interest which over the years becomes quite large.

Longer terms also take long to build equity on homes.Which is the right mortgage? There are basically two types. One in which the interest and the principal amount are paid back every month. In the second, only the interest is paid monthly and the principal paid in lump sum at the end of the term.

Fixed rate mortgage: In a fixed rate mortgage (FRM) interest remains the same through the term of the loan, as against adjustable or floating loans. Other forms of mortgages are interest only mortgage, graduated payment mortgage, adjustable rate mortgage, negative amortization mortgage, and balloon payment mortgage. A fixed rate applies to all of them except for a straight adjustable rate mortgage. A Balloon Payment mortgage can have a fixed rate for the term and ends with balloon payment.

Interest only mortgage: In an interest-only loan the borrower pays only the interest and the principal balance remains unchanged. Once the interest-only term ends the borrower pays the principal, or opts for converting the loan to a principal and interest payment (amortized) model. In the United States, a five or ten year interest-only period is more prevalent. At the end of this period the principal balance is amortized for the remaining term.

Adjustable rate mortgage: In an adjustable rate mortgage (ARM), variable rate mortgage or floating rate mortgage the interest rate is periodically adjusted based on an index.

Graduated payment mortgage: A graduated payment mortgage loan is characterized by low initial monthly payments increasing over a period of time. This scheme is primarily aimed at those who are currently not in a position to pay large amounts but would be after a period of time.

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