The Different Types of Mortgages

Obtaining a mortgage can be a daunting process to inexperienced borrower. Mortgage companies use in their advertising an industry-specific jargon that seems impenetrable at first. It is important for prospective homeowners to understand the law and business of mortgages and the particular vocabulary in which these arrangements are described. There are many different types of mortgages and prospective owners should also understand the difference between various mortgage types before they borrow.

A mortgage is a loan made by a lending institution, typically a bank or some other lending institution, and secured by the property. Mortgages allow everyday people, who will often never possess at any one time the entire sum of money needed to buy their house. In a mortgage, lenders will apportion the loan over the course of the mortgage's life, a process called amortization. Each month the borrower's will pay back a portion of the loan with interest. With each payment the homeowners increase their equity, or percentage of the property owned free and clear. As long as the payments are made on schedule, the borrowers will enjoy all ownership rights to the property. When the loan is fully repaid, then the lending institution will transfer title over the property to its owners. If at any point, however, the borrowers can no longer repay their loan the lending institution has the right to enter into foreclosure proceedings and the home will be resold to resolve the debt.

A second mortgage is a loan on a home secured by the owner's equity in a house. If a homeowner has paid off 50% of their original mortgage they can secure a loan with 50% of the home's original value plus any value by which their home has appreciated. Many families will take out a second mortgage as a means to access the increased value of their home to make improvements or pay for some other high expense like a college education.

There are many variables to consider when obtaining a mortgage. The first consideration is the duration of the mortgage. For centuries many people rented homes rather than purchased them because they could not afford to buy a house or pay for a mortgage over the course of the typical loan period of five years. During the 1950's, longer term mortgages began to appear on the market to allow lower income families to purchase their own home. The longer the term of a mortgage the lower the payments will be. However, the longer the term of a mortgage, the more money you have to pay toward interest. Typical mortgages will be over the course of either 15 or 30 years. However, with rising real estate costs, 40 or even 50 year mortgages are now being offered. The length of the mortgage should always be considered as shorter mortgages will require larger payments but incur less interest. Longer mortgages on the other hand not only incur higher interest rate, but also require a longer commitment to a piece of property.

Another important consideration when obtaining a mortgage is deciding between a fixed or variable rate mortgage. A fixed rate mortgage is a mortgage that has a single interest rate for the term of the mortgage. Fixed rate mortgages give the borrower a sense of stability that their mortgage payments will be the same throughout the course of the mortgage. Since the borrower is locked into accepting the same amount of money each month, a fixed rate mortgage can be more expensive and harder to obtain. A variable rate mortgage is a mortgage in which the interest rate can change based on market indices. A variable rate mortgage can be cheaper and the borrower is protected by caps that limit how often and how much the interest rate can change. For example a variable rate mortgage typically is not allowed to vary in interest rate by more than 6%. A graduated mortgage is a type of fixed mortgage in which the payment amount increases over time. Such mortgages are often obtained by people who expect their earnings to increase over time such as medical or law school graduates. The risk in this type of mortgage is that you can overestimate your future earnings and find yourself unable to pay the higher payments at the end of the mortgage.

Before you purchase a new home, you should learn about the different types of mortgages and which one will work best for you. Contact a bank or real estate agent for additional assistance.