Mortgage: What is mortgage and what are the different types of mortgage?

Mortgage is generally the property you keep as pledge to obtain a loan for purchasing the property itself. Mortgage is not a debt in itself and it only acts as a security to obtain the debt. It is an agreement between the lender and the borrower, where the interest in land is transferred to the lender by the owner under the agreement that the lender will return the interest to the borrower once the loan is repaid or in other words the terms and conditions of the mortgage have been satisfied. Mortgage is therefore the security of the lender based on which he offers the loan. The lender is also known as the mortgagee and the borrower is known as the mortgagor. Since the lender considers your financial strength while advancing mortgage loans, they take into account various factors such as your credit score and your monthly income. A mortgage loan is generally repaid within a fixed period of time and ranges from 10 years to 30 years.

Mortgage can be classified into the following categories – fixed rate mortgage, adjustable rate mortgage, commercial mortgage, home equity line of credit, interest only mortgage, repayment mortgage, and the reverse mortgage. However, the most popular among them are the fixed rate mortgage and the Adjustable rate mortgage.

Fixed Rate Mortgage: In case of fixed rate mortgage, the repayment term varies from 15 to 30 years and the rate of interest remains fixed over the loan period. Although the interest rates are higher than that of adjustable rate of mortgage, it provides security to the borrower against any increase in interest rates. Moreover, the borrower can plan their monthly budget as the monthly payment towards the loan is already determined. The longer is the period of loan repayment; the lower is the monthly payment towards the debt. However, the initial interest rate on fixed rate mortgage is generally higher as compared to adjustable rate mortgage.

Adjustable Rate Mortgage: In this type of mortgage, the interest rate and therefore the monthly installments varies depending the monetary policies of the Federal Bank. Although these loans have low interest rates in the beginning, but they have the risk of increase in interest rate in later periods. However, the advantage of adjustable rate of mortgage is that if the market rate of interest goes down, your interest rate also goes down. This type of mortgage is beneficial only if you go for a short term mortgage loan.