The mortgage loan concept is assets are given as security against receipts of the funds. Mostly, banks and other financial institutes provide loans of 80% value of the mortgaged asset. The mortgage loan is one of the oldest methods of financing and is used today as well. It gives peace of mind to the lender that their money is safe and sound as backed by valuable assets.
Types of mortgage loan
There are two main types of mortgage that include Fixed-rate mortgage and adjustable-rate mortgage. Let’s discuss the details of these mortgage types.
Fixed-rate mortgage
A fixed-rate mortgage is when the loan’s interest rate remains the same throughout the life of a loan. If the tenure of the loan is higher monthly payments are lower in amount. On the contrary, if the loan tenure is a shorter amount, the monthly payment is higher. A fixed-rate mortgage provides peace of mind to the lender that their investment will generate certain income for them.
On the contrary, the borrower can include loan installment in their budget as there is no surprise and everything is fixed in nature.
Moving rate mortgage loan
It’s an adjustable-rate mortgage—the rate of interest changes over the life of the loan facility. Fluctuation in the rate of interest directly impacts the amount of installment. Suppose there is an increase in interest rate, the amount of installment increases, and vice versa. The rate of interest is tied with some benchmarking rates like LBOR.
Component of the payment
The components of the mortgage payment include principal repayment, interest, taxes, and insurance expenses. Let’s discuss these elements of the payments.
Principal repayment
This is the original repayment of the funds that were originally disbursed to the lender. As a matter of practice, principal repayments are fixed and do not change usually. However, there are certain situations when restructuring is made, and the size of the principal repayment may change accordingly.
Interest
Interest is the amount of earnings for the lender of money. It might change or remain fixed over the life of the loan. The loan is fixed, or variable can be ascertained by reviewing the loan documents.
Other elements of the loan installments include property taxes, municipal taxes, and other taxes that the property owner has to incur.
Read more on finance.
