Many people are already familiar with this term Mortgage. It is a very important factor of our financial market and has to be dealt with seriously. So, in this article, we will discuss the Mortgage Definition along with other important things which will help you to get a clear idea about it. So, let’s start.
What is Mortgage?
The mortgage is actually a debt instrument which is generally made to raise money for a buying. For example, when someone wants to buy a property or asset h/she simply goes to the bank for the support and the bank helps that person by providing money with collateral. The bank or the lender of money take interest for the sum they are providing. The borrower has to repay the money within a certified date to avoid late charges. And if the borrower fails to repay the provided money the bank can simply sell the collateral to compensate its losses.
There are a few things attached to a Mortgage and we will have to analyze all those to completely understand the Mortgage Definition. The mortgagor has to specify a few things before the lender to accrue the loan. For example, one has to specify the time by which h/she will repay the debt along with the interest. So, the main benefit of a mortgage is that one doesn’t have to pay the whole amount of an asset at the time of the purchase. It’s always very important to study the whole process before entering into a mortgage agreement. One can use the mortgage calculator to see the exact amount of money h/she has to pay during the mortgage period. There are different types of mortgages available in the market and now we will discuss a few of those types to know more about what is mortgage.
Types of Mortgages
- Fixed-Rate Mortgage- In a fixed-rate mortgage the borrower has to pay a fixed rate of interest in the whole period of payment. If the market interest rate goes up or down it will not affect the interest payment rates. Generally, the fixed-rate mortgages have 15 to 20-year terms. Generally, lesser the mortgage period, lesser amount one has to pay for the mortgage. So, no doubt that the short-term mortgages are getting more popular across the US.
- Adjustable-Rate Mortgage (ARM)- The adjustable-rate mortgage is completely different than the fixed-rate mortgage. In an ARM the interest rate depends on the market rates and fluctuates a lot along with it. So, if the market rate goes down the borrower can secure a significant amount of money. These types of mortgages are very popular in the UK and Australia.
- Interest-Only Mortgage- Just like the term in interest-only mortgages the borrower only has to pay the interest rate of the mortgage for a certain period of time. And after a certain period, the person has to start paying the main amount. This can often be a very risky deal because after that period the payable mortgage amount rises significantly and sometimes can result in a default situation.
- Balloon Mortgage- The balloon mortgages have a short-term mortgage period and are very much popular all over the US. But just like the interest-only mortgage this type of mortgages can also be very much risky because of its heavy amount of payment.
- Government-Backed Mortgage- To provide home ownership the federal government provides home loans to the low-income households. Now if the person fails to pay the loan the government pays for the losses to the lender. For example, the FAH loans which are backed by the Federal Housing Administration provide loans to low-income families so they can afford a house.
- Second Mortgage- It is a kind of a mortgage where you can get money from your home equity. If you have a certain parentage of available equity in your home then the lender will provide you with a HELOC which you can use to repay your debts.
- Chattel Mortgage– Chattel Mortgage is different than the other mortgages. It uses movable objects like cars and mobile house as a security for loan.
There are also other types of mortgages available in the market, but these are the basic mortgage types you will mostly come across.
So, in above we have discussed what is mortgage with a complete mortgage definition, which I think is enough to give you a complete idea about this topic. This topic will also clear your the doubts about the types of mortgages. So, just read this article and you will get all the information you need about it.