Mortgage loan refers to a loan that is secured by
a mortgage on real property. Since these loans are secured, the value of the property
reduces the risk factor involved. Thus mortgage loans may be available at lower
interest rates as compared to other types of borrowing.
Mortgage loans are structured as long-term loans
and the periodic payments for them are calculated according to time value of
money. The payment is generally through Equated Monthly Installments (EMIs)
paid over the term of the loan. Over the period, the principal amount borrowed,
would be slowly paid off through amortization.
It is very important to choose the right type of
mortgage loan, like it is important to choose the right lender. Doing a little
bit of homework will help you understand what the loan officer speaks, who most
of the time otherwise seems to be speaking in an alien language.
There are two basic types of amortized mortgage
loans viz.
1. Fixed Rate Mortgage Loans: In fixed rate
mortgages, the interest rate remains fixed for the entire term of loan. Thus
they are more predictable than other types of mortgage loans. Fixed rate loans
are generally up to 30, 20, 15 and 10 years. The longer the term of loan,
larger is the amount of interest paid than the principle, this means larger tax
deductions.
Since the interest rate remains fixed, you are
saved from paying higher rates as per market fluctuations. At the same time you
might loose the opportunity of borrowing at lower rates if market rates fall.
If the fall in interest rate is 2 points or more, and you plan to reside in the
same house for at least 18 months more, you can opt for mortgage refinancing.
2. Adjustable Rate Mortgage Loans: Also called
floating rate or variable rate mortgage, these loans are popular because of the
lower interest rates at the beginning. Adjustable rates are a little easier to
obtain since some risk is transferred from the lender to borrower. Also lower
interest rates may qualify the borrower for a larger loan amount.
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