What is a Mortgage? Definition & Meaning of Mortgage
Definition and Meaning of Mortgage – Purchasing real estate can be very expensive, so most people avail of home loans. Mortgage isn’t the loan itself. It actually refers to the agreement within such loan which states that your lender can seize or foreclose on the property given the scenario that you fail to pay your debts as agreed. Since contracts for home loans are required to be in writing, the mortgage is also the document that gives the person or entity you owe the right to do so. This serves as collateral or a protection against the possibility of you not settling such loan.
Types of Mortgage Loans
According to Flexibility of Interest Rate
- Fixed Rate Mortgage Loan – As the name suggests, a debtor will have to pay a fixed amount of money periodically until the entire principal amount has been paid. For instance, you may be required to pay an unchanging amount of $1000 every month for 30 years. The interest rate will also be the same for the entire term. This type of mortgage loan is recommended for first-time debtors and those who can handle long term loans due to the stability of the periodic payable.
- Adjustable Rate Mortgage Loan – In contrast with the first type, the interest rate for the payment of loan is bound to change in the future. Suppose you availed of 5/1 Adjustable Rate Mortgage Loan, the first digit stands for how long will the interest rate be temporarily fixed (five years) and the second would represent the length of the interval between every “adjustment” (1 year). Its initial required payment is lower than that of the previous type, but the debtor is only aware of when the interest rate will change but not for how much.
According to Inclusion of Source
- Conventional Mortgage Loan – This type is not covered by any insurance from the federal government and is offered entirely by the private sector. This saves the costs from compulsory payment of mortgage insurance provided that you settle a down payment of 20% or higher. An initial disbursement of anything less will then require you to avail of a Private Mortgage Insurance.
- Government Insured Mortgage Loan – Conversely, this type of mortgage loan is provided and secured by the government itself. Government entities that offer such include the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture.
According to Size
- Conforming Mortgage Loan – As implied by its name, these types of loans must conform to pre-determined criteria that limit the amount that could be borrowed by a particular applicant. Such standard is based on the guidelines of Fannie Mae or Freddie Mac – both government-controlled corporations who purchase loans from creditors and sells them to interested investors.
- Jumbo Mortgage Loan – On the other hand, this type significantly exceeds the set limitations of the previous type. Alongside a higher interest rate and required amount of down payment, a debtor can only be granted with a jumbo mortgage loan if he has an impressive credit record.