What Is A Mortgage

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Introduction

Mortgages come in many different shapes and sizes, each with its own advantages

and disadvantages. Since mortgage debt is often the largest debt owed by the

debtor, banks and other mortgage lenders run title searches of the real

property to make certain that there are no mortgages already registered on the

debtor’s property which might have higher priority. Tax liens, in some cases,

will come ahead of mortgages.Here are some basic things to know about mortgages:

Mortgage companies and lenders are the institutions that will lend you money to

pay for your home.It is a good idea to shop around for a lender or mortgage

company, as every institution will offers different mortgage rates and

mortgages. How mortgages work, where to get one and the different deals

available Types of mortgage. Other forms of mortgage loan include interest

only mortgage, fixed rate mortgage, negative amortization mortgage, and balloon

payment mortgage. One of the decisions you’ll have to make includes whether to

get a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM).

Fixed

With a fixed rate mortgage, your monthly rates will always be the same. Due to

the inherent interest rate risk, long-term fixed rates will tend to be higher

than short-term rates (which are the basis for variable-rate loans and

mortgages). Some fixed-rate loans start with one rate for one or two years

and then change to another rate for the remaining term of the loan. If you

feel the current rates are low and you plan to stay in your house for a long

time, you may want to consider a fixed-rate loan. With a fixed-payment loan,

if the borrower was unable to meet the fixed payment, they would risk late fees

or foreclosure.

Arm

ARMs generally permit borrowers to lower their payments if they are willing to

assume the risk of interest rate changes. An adjustable rate mortgage (ARM),

variable rate mortgage or floating rate mortgage is a mortgage loan where the

interest rate on the note is periodically adjusted based on an index. A hybrid

adjustable-rate mortgage (ARM) is one where the interest rate on the note is

fixed for a period of time, then floats thereafter. Hybrid ARMs are referred

to by their initial fixed period and adjustment periods, for example 3/1 for an

ARM with a 3-year fixed period and subsequent 1-year rate adjustment periods.

After the reset date, a hybrid ARM floats at a margin over a specified index

just like any ordinary ARM. The popularity of hybrid ARMs has significantly

increased in recent years. Like other adjustable-rate products, hybrid ARMs

transfer some interest rate risk from the lender to the borrower, thus allowing

the lender to offer a lower note rate. An “option ARM” is a loan where the

borrower has the option of making either a specified minimum payment, an

interest-only payment, or a 15-year or 30-year fixed rate payment in a given

month. When pricing an Option ARM, never focus on the Start Rate of 1% or 2%,

consider only the Fully Indexed Rate (FIR) which is the Margin and the current

Index being used (12-MTA, LIBOR, etc. The main risk of an Option ARM is

“payment shock”, when the negative amortization reaches a stated maximum, at

which point the minimum payment will be raised to a level that amortizes the

loan balance. Historically, option ARM mortgages have been used effectively to

minimize income taxes and maximize mortgage interest deductions by high net

worth homeowners whose earnings are primarily derived from passive or

investment income. Option ARM mortgages are increasingly available in Hybrid,

or temporarily Fixed Rate varieties, from 3 to 10 years, mitigating certain

negative amortization characteristics of the popular Adjustable Rate variety.

As an example, a 5/1 ARM means that the initial interest rate applies for five

years (or 60 months, in terms of payments), after which the interest rate is

adjusted annually. Calculating this is important for ARM buyers, since it

helps predict the future interest rate of the loan. This is the major risk of

an ARM, as this can lead to severe financial hardship for the borrower.

Conclusion

Mortgages are a necessary part of home buying. Mortgages will allow you to own

a home, whether a starter home or the home of your dreams, without having to

wait until you can pay for it outright. Whether you are a first time buyer

learning about mortgages for the first time, investing in buy to let or need to

remortgage but have bad credit , we believe that the best way to prepare you

for your mortgage decisions is to keep you as informed as possible about all

the mortgage types available to you.

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