The modern mortgage market offers a variety of mortgage loans catering to the needs of home
buyers. The titles and details of these plans can become confusing, especially as new types are
introduced continuously. You can make sense of these loan types, however, if you understand the
basic principles that govern all mortgage loans. Again, you can look to your real estate professional
Basic Principles of all Mortgage Loans
The home is used as security to back up the loan. A lender can force sale of the home if the borrower defaults by
failing to make scheduled payments.
The larger the loan compared to the value of the home, the more risky for the lender and, often, the more expensive
the loan will be.
Interest earned by the lender always is equal to the periodic interest rate times the outstanding principle balance of
the loan. The periodic interest rate is the annual interest rate divided by the number of payments in the year (usually
one per month).
The required payment usually is a bit larger than the interest due so that some of the loan principal is repaid with
each payment. This process is called Amortization and is why most mortgage loans can be retired when all the
monthly payments have been made.
All mortgage loans have one of the following features:
Fixed payment and fixed interest rate - fixed rate mortgages
Fixed rate but variable payment - graduated payment mortgages
Variable rate and variable payment - adjustable rate mortgages
As you learn more about the types of financing available, you will notice that some loans appear to have more favorable
terms. That may indicate that those loans are, indeed, bargains (and it does pay to shop around), but usually it means that
those loans could have some feature that is less appealing to borrowers. For example, shorter-term loans often have
slightly lower interest rates compared to longer-term loans. However, the monthly payment for the same amount of
principal may be higher because of the shorter term. Variable rate loans usually have much lower interest rates to
compensate for the risk the borrower accepts that interest rates will rise in the future.
Crystal Falls: (906) 875-6331 | Iron River: (906) 265-6133 | Iron Mountain: (906) 828-2629
© 2019 RE/MAX North Country, Crystal Falls (906) 875-6331, Iron River (906) 265-6133, Iron Mountain 906-828-2629
Equal Housing Opportunity. Each RE/MAX® Office is Independently Owned and Operated.
RE/MAX of Michigan agents are licensed in the state of Michigan.
Website created by North Country Website Design