Monday, May 20, 2024

What is a mortgage and what are the main types in existence?


A mortgage is a type of a loan that is extended to a borrower by a mortgage lender or a bank. The loan is usually intended for the purposes of acquiring a home or property. In most cases, the loan extended to a borrower only covers up to 80% of the value of the home while the borrower has to cover the remaining amount out of their own pocket. However, this doesn’t happen in all cases because there are cases where the mortgage extended might cover the entire cost of the home. The amount given in mortgage is usually payable after an agreed period of time and the home purchased serves as collateral and non-payment prompts the mortgage lender or bank to repossess the house. The lender retains the right to sell the house to recoup the money owed.

lendo bolån can be broadly placed into two groups, that is, fixed-rate and adjustable-rate mortgages. The term variable rate mortgage is also often used for adjustable rate mortgages. Let us take a look at these two types of mortgages.

Fixed-rate mortgages

Like you might have already guessed or like it is suggested in the name, fixed-rate mortgages are the type of mortgages where the lender extends a loan to a borrower at an established interest rate. The loans are usually repaid within a period of 15, 20, or even 30 years. In this type of mortgage, the borrower usually decides how long they would like the loan to go. If they choose a shorter period of time, the loan will usually attract a higher monthly payment. On the other hand, the longer the borrower takes to repay the loan the lower the amount they are required to pay back the lender per month. However, taking longer to repay the loan also makes the borrower to pay back more money than if they paid higher monthly payments, but for a shorter period of time.

Being able to pay the same amount of monthly payment every month throughout the duration of the loan is the main advantage that borrowers have when it comes to fixed-interest mortgages.

Adjustable-rate mortgages

Adjustable mortgages are usually tagged with interest rates that vary in the course of the duration of the loan. The interest rate usually fluctuates because of a number of factors, including market rates. When the interest rate changes, the amount that the borrower has to pay per month also changes. The lender usually reviews and adjusts the interest rate at specific points in time in future

Mortgage payments

Like we have already seen, mortgages are usually repaid on a monthly basis and are made up of four main parts, that is, principal, interest, taxes, and insurance. The principal refers to the total amount of the loan the lender extends to the borrower while the interest refers to the monthly percentage added to every payment a borrower makes in a month. Mortgage payments usually include property taxes one has to pay in most cases. The same applies to homeowner’s insurance.

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