• Different types of Mortgage Products

    Fixed rate mortgage

    A fixed-rate loan is a mortgage that allows borrowers to fully amortize a mortgage by making equal monthly payments of principal and interest for a pre-determined term and a constant interest rate. Interest rates remains fixed throughout the loan period. Do not vary according to the market price

    Advantage

    • Spread out of payments as smaller payments are made over a long period of time.
    • As the interest rate does not change, buyers are protected from sudden increase in monthly mortgage payments if interest rates rise.
    • Easy to understand
    • Fixed rate offers the strength and stability to borrowers.
    • Permit borrowers to make extra payments in order to shorten the term of the loan or to make lump-sum payments to retire the loan early.

    Disadvantage

    • Qualifying for the loan is more difficult as the payments are less affordable
    • If interest rates fall, the interest rate on the loan doesn’t change and neither does the monthly payment.
    • Higher monthly payment than other mortgage choices.

    Adjustable Rate Mortgage

    An adjustable rate loan is a mortgage that permits the lender to adjust its interest rate periodically depending on the movement of a specified index or reference rate (e.g. LIBOR, COFI Index, etc.). Some are referred as “hybrid: since they offer a fixed rate for the first few years. The most popular ARM loans are the 3/1, 5/1, and 7/1 ARMs. “3/1” indicates that the rate is fixed for 3 years and then adjusts every 1 year after that.

    An Adjustable Rate Mortgage is a loan where the interest rate frequently adjusted during the loan period. Interest rates change according to the base rates of the central bank and cost changes in the credit markets.

    Option ARM

    It is an ARM on which the interest rate adjusts monthly and the payment adjusts annually, with borrowers offered options on how large a payment they will make. The options include interest-only, and a “minimum” payment that may be less than the interest-only payment. The minimum payment option could result in a growing loan balance, termed “negative amortization” (i.e. the loan balance actually increases). For this reason, Option ARMs have higher risk profiles.

    HELOC

    A Home Equity Line of Credit (HELOC) is a mortgage loan, which is usually in a subordinate position, that allows the borrower to obtain multiple advances of the loan proceeds at his/her own discretion, up to an amount that represents a specified percentage of the borrower’s equity in a property.

    Balloon Mortgage

    The mortgage which leaves a balance due at the period of maturity being not fully repaid over the loan term is called a balloon mortgage. Because of the payment being done in large size, the final payment is referred to as the balloon payment. It may have either fixed or floating interest rate

    A balloon mortgage consists of equal monthly payments based on a 15 to 20 year amortization, but does not fully amortize the loan. At the end of the balloon term, generally 3, 5, 7, or 10 years, a large final payment is due, equal to the remaining balance on the loan. Like Example: The balloon mortgage called for payments of USD 5000 per month for 5 years, followed by a Balloon Payment of USD 150,000

    Balloon Loans:  The Balloon loans are the short-term mortgage loans (usually of 5 – 7 years) similar to a fixed rate mortgage Loan. A balloon loan allows the consumer to borrow a large amount of money over a short amount of time but with low monthly payments.

    Balloon Payment:  The final instalment of a loan to be paid that is considerably higher than prior regular instalments.

    A short-term mortgage in which small periodic payments are made until the completion of the term, at which time the balance is due as a single lump-sum payment.

    People with irregular or seasonal sources of income find a balloon payment useful for budgeting their expenses. People who know their income will greatly improve within the next few years.

    The major disadvantage of this mortgage is to pay the high amount of money at the end of term. If the borrower is unable to repay the balloon payment when it is due, he must return the item bought with the loan to the lender, thereby losing the money paid out in earlier installments.

    Reverse Mortgage

    Reverse mortgages are for individuals who already own a home with no or very little indebtedness. The lender makes either a one-time or periodic payments to the borrower. These payments result in a negative amortization. Repayment of the resulting balance is generally only required upon the borrower’s death or sale of the property.

    The main Objective for the same is to address the financial needs of senior citizens owning self-occupied property (house), for leading a decent life.

    Key characteristics

    • This product is extensively sold in developed countries to ageing individuals who own property.
    • Some Reverse Mortgage products provide payments till the individual is alive, as against a fixed time period.
    • Such products benefit elderly people who have no steady sources of income for their expenses.

    At the end of these payments, the property belongs to the lender.

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