Types of Mortgages
Mortgages are generally referred to as “liens against real estate”debts on real property.” A fixed-rate mortgage is designed to maintain the principle amount for the duration of the mortgage and is fixed in time. This type of mortgage allows the lender to keep track of payments on the mortgage loan. A variable-rate mortgage varies in the rate of interest it charges its borrowers.
Fixed-rate mortgages provide borrowers with a steady rate of interest over time. When market interest rates increase, the lender’s payment does not change in the initial loan payment until market rates have fallen significantly. However, if rates fall below the initial fixed interest rate, there can be a negative impact on the overall interest rate paid by the loan borrower. The fixed rate mortgage offers security and stability for a borrower who can count on that interest rate to stay at the same level throughout the term of the mortgage loan. As the mortgage payments get closer to the time when they need to be paid off, however, interest rates will begin to go up to the initial fixed rate mortgage interest rate.
Adjustable-rate mortgages (ARM) are variable-rate loans that may fluctuate between an initial fixed rate and a range of variable interest rates that can change periodically. ARM mortgages have more risk than fixed rate mortgages. If the initial fixed interest rate is increased or decreased, borrowers face an immediate impact on their monthly payment. If interest rates drop below the initial fixed interest rate, the balance of the mortgage is affected negatively. By comparison, a fixed rate mortgage is not affected by changing market rates.
An ARM mortgage is a good choice for borrowers who want to lock in their monthly payments for the length of their loan and avoid paying a large amount of interest over a long period of time. Adjustable-rate mortgages have a greater risk than fixed rate mortgages, but they do provide a higher return on a loan and lower payments than a fixed rate mortgage would.
Variable-rate mortgages require a lender to make a loan-to-value (LTV) adjustments before offering a variable-rate loan. This adjustment may happen in a number of ways, including: (I) changing the federal funds rate, (ii) changing the local Federal Reserve rate, or (iii) changing the prime rate. A fixed-rate mortgage does not adjust its LTV. based on any outside factors.
Many people purchase mortgages when the interest rates are low and purchase homes with the expectation that the interest rates will continue to be low for years to come. However, mortgage interest rates do not always remain flat. In a “recessionary” economy, market-driven interest rates can fall dramatically, especially if unemployment rates are high, or interest rates are increasing at a fast rate. Investors often sell homes that are high-risk to them when market rates drop.
Mortgage refinancing is also useful in situations where a homeowner needs a second or third mortgage to finance home improvements, remodeling, or home repairs, as well as emergencies where you can borrow money for a new car, debt consolidation, education, or business investments. The cost of borrowing money is not affected by a fixed rate mortgage. Interest only payments are lower, and you can borrow more than your equity, so your monthly payments can be lowered if the interest rate on the existing loan goes up.
Adjustable-rate mortgages are more attractive for borrowers who wish to refinance their current mortgage. Adjustable-rate mortgages (ARM) are often fixed from inception but may rise in value during periods of economic instability. Some adjustable-rate mortgages (ARM) feature “teaser” interest rates, which allow you to borrow more money and pay the lower interest rates until the market interest rates have increased, at which point the higher interest rate is set to begin.
Fixed-rate mortgages generally require a lender to hold the loan-to-value for an extended period of time and to make changes in rates. when the rate reaches an agreed upon level. This gives the borrower the ability to lock in their mortgage rate, but also means that interest rates will generally not change rapidly or drastically.
Many people use mortgage loans as a vehicle for making purchases. By purchasing a home that is low-risk to borrow, homeowners can invest in the home and save money in the long-term. Many homeowners are able to lower their monthly payments and use their mortgage as a source of income.