Mortgage Types – Fixed Rate Mortgages Vs Adjustable Rate Mortgages
Mortgages are a specific debt instrument, secured against the secured property of the borrowers, which the borrowers are obliged to repay continuously with a fixed amount of payments for a specified period of time. Mortgages have also been called “claims on real property” or “encumbrances on real property.” If the borrower fails to pay the mortgage, then the lender may foreclose. If mortgage payments are regularly missed, the property is put up for auction in order to meet all the commitments.
Mortgages can be taken out for different purposes. They can be taken to buy new residential houses, to finance home improvements, to take a vacation, to go for higher education, or to buy a business. Many mortgages are taken for certain duration during the life of the loan agreement. The interest rates charged for mortgages depend on the amount of the loan and the term of the agreement. A mortgagee pays interest on the principal and also on a portion of the unpaid interest.
Mortgages can also be taken out for refinancing purposes. Mortgages can be either a fixed or adjustable rate mortgage, with the main difference being the initial interest rate. Mortgages can be used to finance both purchasing and refinancing real estate properties. Mortgages can also be taken out to convert a first mortgage to a second mortgage, if the existing mortgage does not cover the cost of the loan. Mortgages can also be taken out as a form of “buy down” on homes that have experienced “subprime” mortgage problems.
Mortgages work on a dual basis. First, the lender is the person who finances the loan, providing security against the debt, and the money is repaid when the property owner finally sells the property or permanently leaves the property. Second, the property purchased will become the security for repayment of the loan. As with all types of mortgages, borrowers need to qualify for mortgages in order to obtain the loan.
Fixed-rate mortgages work on a set interest rate for the entire term. The amount paid by the borrower each month is determined at the time the loan is taken out. This payment amount is often low compared to mortgage rates at the time of taking out the loan. However, if there are increases in any financial benchmark, then the fixed-rate mortgage will be adjusted to reflect these changes.
Adjustable-rate mortgages are often better for borrowers who want to repay the loan early. These mortgages allow you to raise the repayments gradually over a longer period of time and gradually pay down the principal on the loan. Mortgages have an additional advantage of tax benefits. If the property is used as a rental property and the borrower lives in that property as their principal residence, they may also benefit from tax relief.