Buying real estate is undoubtedly considered to be a large financial burden. Mortgage lending serves as the best mechanism to finance private ownership of residential, as well as commercial property. A mortgage loan is a kind of a loan, being secured by real property. Just like the other loans, mortgages have certain interest rates, which are due to be paid over a particular period of time, typically 25-30 years. The main feature, that makes mortgages different from common loans, is that mortgage represents some kind of encumbrance on the property. In other words, certain restrictions are always imposed on the disposal of the property by the owner, for instance, unless the outstanding debt is paid fully, selling the property is prohibited. Another aspect, making mortgage loans distinct from other types of loans is foreclosing or seizing the property by the lender when certain circumstances, such as failing or detaining paying defaults, occur. Despite the mentioned, in some jurisdictions lenders are too limited in foreclosing pledged property, causing considerable slowdown in lending market development. Besides, mortgage loans in some countries may have non-recourse character-the creditor is authorized to seize the collateral without having right on any remaining deficiency, while common mortgage loans always set responsibility on the borrower to cover all remaining debts whether the net of costs, receiving from the sale is sufficient for paying the debt or not.

Depending on the type of collateral, mortgage loans can be residential or commercial. In both cases real estate is used as securing pledge of the loan, but in commercial mortgages the collateral must be represented by the business’ real estate rather than residential one. This kind of mortgage is usually referred by partnerships, limited companies, etc. and not individual borrowers. While the value of the property and thus creditworthiness of residential mortgages may be determined by certain ways-that is using the transaction value of the property, appraise or survive the value or estimate it, evaluation of the business creditworthiness is always connected with more complicated factors.

Mortgage loans may differ depending on various factors such as terms, payment amounts and frequencies, etc. But the interest rates are the most essential distinguishing factors. Depending on it, mortgage loans may be divided in two basic types-fixed rate mortgages and adjustable rate mortgages also referred as floating or variable rate mortgages. As interest rates remain the same for the whole term of the loan, fixed rate mortgages are attractive for borrowers taking long-term (mostly from 3 to 25 years) loans and willing to secure themselves from radical fluctuation of the rates. In difference with the rates and the principal amount of the loan that should be paid, property taxes or insurance costs may usually vary from one point to another.

In variable rate mortgages rates change adjusting up to different market indices. As the risk of fluctuating rates is partially transferred from the lender to the borrower, adjustable rate mortgages are as usual available in lower rates (approximately from 0,5 to 2 % lower) than in fixed rate mortgages. It’s also possible to opt for combination of fixed and adjustable rate mortgages setting a fixed rate for a particular period of time, after which the change of the rates is possible.

According to amortization periods, we can distinguish amortizing loans from a partial amortization loans or bullet loans. Amortizing loans don’t require paying the principal amount at a certain date; it must be paid step by step during the whole life of the loan. On the other side, a bullet loan is a kind of a lone, where the principal of the loan, sometimes along with the interest rates is due to be covered at the end of the loan term. Because of the large size of the last payment, bullet loans are also referred as balloon loans. There are loans with no amortization or with negative amortization. The latter means that monthly payments of interest rates are less than is due to the lender. The unpaid sum is later added to the principal amount of the loan.

Recently jumbo mortgages have gained much popularity on American loan market. A Jumbo mortgage belongs to so-called non-conforming loans, as they exceed the standard conventional loan limits, set by American federal mortgage association. Consumers, willing to purchase luxurious residences, price of which highly exceed the above-mentioned limits, can successfully refer to jumbo loans. But some negative aspects are connected with taking a jumbo loan. Rising risks on the lenders’ side is among them, as selling such valuable property in case of defaults may appear a serious obstacle for them. Because of the mentioned risks, interests rates are correspondingly higher on such loans.

This is a brief review of mortgage loan types, showing that the financial market is sufficiently provided with most kinds of mortgage loans in order to fit every possible requirement of customers and be in compliance with their demands.

Author: Alexander Anderson
Article Source: EzineArticles.com
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