Mortgage loans are financial loans taken for real estate properties that the borrower has to repay with interest within a fixed period of time. A mortgage loan requires some sort of security for the lender. This security is called the collateral and in most cases, it is the real estate property itself for which the mortgage loan has been taken. Since the property itself is kept as the collateral, no further security is needed.
The person who lends the mortgage loan is called the mortgagee, while the person who borrows the loan is called the mortgagor. The mortgagee and mortgagor are bound by the mortgage loan agreement. The agreement entitles the mortgagor to receive a financial loan from the mortgagee. The promissory note in the agreement secures the mortgagee, which entitles them to the collateral and a promise made by the mortgagor to repay the mortgage loan in due time. The typical period for a mortgage loan may be 10, 15, 20 or 30 years.
There are two fundamental types of mortgage loans, fixed-rate mortgages and adjustable-rate mortgages. Fixed-rate mortgages have interest rates that are locked for the life of the mortgage, while adjustable-rate mortgages have interest rates that may go up or down according to a market index. Therefore, fixed-rate mortgages provide security to the mortgagor, while adjustable-rate mortgages provide security to the mortgagee.
Mortgage loans above 80% of the property value need added security for the mortgagee. This is done in the form of insurance policies, called mortgage insurance. The premiums of mortgage insurance policies are passed on to the borrower in their monthly payments. Depending on your credit score and the amount borrowed versus the value or purchase price also known as the loan to value (LTV), you will either need a Conventional Mortgage with mortgage insurance, or a government backed mortgage given by the Federal Housing Administration (FHA). More information about these types of mortgages will be given in a future post.
Lester Bleich, New York State Licensed Mortgage Loan Originator 