home loans – mortgage refinance second mortage

Martin Lukac asked:


With the real estate prices sky rocketing, mortgage loans are a boon when it comes to purchasing your dream home. You can opt for a mortgage loan as a first time home buyer, or to move up, or to refinance an old mortgage, or to access the equity blocked in the house. Whatever may be the reason, it is important to have a basic knowledge about mortgage loans and its types.

Mortgage loan refers to a loan that is secured by a mortgage on real property. Since these loans are secured, the value of the property reduces the risk factor involved. Thus mortgage loans may be available at lower interest rates as compared to other types of borrowing.

Mortgage loans are structured as long-term loans and the periodic payments for them are calculated according to time value of money. The payment is generally through Equated Monthly Installments (EMIs) paid over the term of the loan. Over the period, the principal amount borrowed, would be slowly paid off through amortization.

It is very important to choose the right type of mortgage loan, like it is important to choose the right lender. Doing a little bit of homework will help you understand what the loan officer speaks, who most of the time otherwise seems to be speaking in an alien language.

There are two basic types of amortized mortgage loans viz.

1.Fixed Rate Mortgage Loans: In fixed rate mortgages, the interest rate remains fixed for the entire term of loan. Thus they are more predictable than other types of mortgage loans. Fixed rate loans are generally up to 30, 20, 15 and 10 years. The longer the term of loan, larger is the amount of interest paid than the principle, this means larger tax deductions.

Since the interest rate remains fixed, you are saved from paying higher rates as per market fluctuations. At the same time you might loose the opportunity of borrowing at lower rates if market rates fall. If the fall in interest rate is 2 points or more, and you plan to reside in the same house for at least 18 months more, you can opt for mortgage refinancing.

2.Adjustable Rate Mortgage Loans: Also called floating rate or variable rate mortgage, these loans are popular because of the lower interest rates at the beginning. Adjustable rates are a little easier to obtain since some risk is transferred from the lender to borrower. Also lower interest rates may qualify the borrower for a larger loan amount.

In Floating rate mortgage loans interest rate is generally fixed for a period of time, after which it periodically adjusts to certain market indices. The most common market indices used are Prime Rate, London Interbank Offered Rate (LIBOR) and Treasury Index (T-bill). There is a cap on the margin that restricts the lender from charging interest rates higher than a certain point. This safeguards the interest of the borrower to a certain extent.

If you want to borrow money for your business purposes; you can opt for commercial mortgage loan. Commercial mortgage is similar to a residential mortgage, except that the collateral security given will be a commercial building or other business property and not a residential property.

All types of mortgage loans are generally non-recourse. This means that in case of default in payment, the lender can only seize the collateral security to recover the loan amount. Even if the collateral is insufficient to reimburse the loan in full, the lender has no further claim against the borrower.



RANDOLPH