A mortgage loan is a loan where the lender holds real property as security for the debt. In casual speak, we often refer to the loan itself as mortgage even though the mortgage is actually the security interest of the lender in the property.
If the borrower defaults on a mortgage loan, the lender is legally permitted to take possession of the secured property and sell it, so called foreclosure or repossession.
FRM and ARM
The two basic types of amortized mortgage loans are fixed-rate mortgage loans (FRM) and adjustable-rate mortgage loans (ARM).
- With a fixed-rate mortgage loan, the interest rate of the loan is fixed for the term of the loan. This is the most common type of home mortgage loan in the United States. A fixed-rate mortgage loan will usually have an annuity repayment scheme where the borrower makes periodic payments of the same size throughout the term of the loan. Another alternative is linear payback, where the payments start out big and then gradually become smaller over the term of the loan.
- The adjustable-rate mortgage loan is also known as a floating rate mortgage loan or a variable rate mortgage loan. This is the most common type of home mortgage loan in many European countries. It is unusual for an ARM loan to have an interest rate that is continuously fluctuating from day to day. Instead, the interest rate will be fixed for a certain amount of time, such as a month or a year. Once this period is over, the interest rate will be adjusted according to circumstances. The interest rate can be adjusted upwards as well as downwards. Compared to long-term FRM loans, ARM loans tend to have a lower interest rate since a part of the risk is transferred from the lender to the borrower.
Regardless of which type of mortgage you decide to get it is important to do what you can to find a mortgage with as low an interest rate as possible. You can do this by calling different banks or by using a rate comparison website. Make sure that you visit a website that targets your local market. If you do not visit one that targets your local market you risk getting erroneous information. A good example of a local rate comparison website is the Swedish site ränta.com. A good website will just like ränta.com offer a simple layout that makes it easy to see and compare interest rates. It is important to remember that the rates that are being displayed on websites like ränta.com are advertised rates. The exact rate that you are given might differ from this rate due to your financial situation and the risk the bank thinks is associated with giving you a mortgage. If you have a good economy it is often possible to negotiate a rate that is lower than that you find on their website and on rate comparison websites.
Interest only mortgage loan
On a traditional mortgage loan, you will be paying interest and pay down the principal (the borrowed amount) until your loan is paid back in full. There are however alternatives to this type of standard mortgage loan. It is today possible to obtain interest-only mortgage loans as well as loans where you don’t pay any interest rate nor pay down the principal during the duration of the loan.
An interest-only mortgage loan is a loan where the principal (the borrowed amount) is not gradually repaid throughout the term. Of course, the lender wants their money back, but the repayment is arranged in a different way than with the traditional mortgage loan.
In some countries, including the United Kingdom, a popular form of interest-only mortgage is the investment-backed mortgage loan. The borrower makes regular contributions to a separate investment plan. The idea is to create an asset that is valuable enough to repay the principal when the loan term is over. Of course, there is always a risk of the investment not becoming large enough to repay the loan in full.
Another version of the interest rate only mortgage loan is the one where the borrower plans to sell the real estate when the loan term is over and use the proceeds to pay back the principal. This solution can, for instance, be a suitable alternative for a couple that wish to live in a large house while raising their children, but is okay with selling the house and moving into something less expensive once the children have moved away from home. Just as with the investment-backed mortgage loan, there is a risk that the house, when sold, will not fetch a large enough sum to pay back the principal in full.
No capital – no interest mortgage loan
The no capital – no-interest mortgage loan is typically marketed to older borrowers, especially those who have already retired. With this type of mortgage loan, the borrower will not pay any interest rate and will not be paying down the principal either. The debt will increase each year. The debt will not be paid back until the mortgaged real estate is sold, something which may take place after the borrower is deceased.
The no capital – no interest mortgage loan is not necessarily a loan obtained to purchase real estate. In many cases, the person obtaining this type of loan already owns real estate outright without any lien on it. The no capital – no-interest mortgage loan will provide the borrower with a lump sum or with a monthly or yearly “income” from the lender. A lump sum can, for instance, be used to cover health care costs or to realize a life-long dream-like travelling around the world, while monthly or yearly payouts can be used to bolster the quality of life by allowing for a somewhat more opulent lifestyle than what could be achieved on pension only. The older person can keep living in his or her house while at the same time enjoy spending the equity of the house while they’re still alive.
A wraparound mortgage is a type of secondary financing for real estate purchases. It is a form of seller financing that can expedite the sale of a property.
The seller of the real estate extends a junior mortgage loan to the buyer of the real estate. This junior mortgage loan wraps around and exists in addition to any superior mortgage loan on the real estate. The seller of the real estate accepts a secured promissory note from the buyer of the real estate for the amount due on the underlying mortgage loan + any amount up to the remaining purchase money balance. In most cases, the seller of the real estate will charge the buyer a spread.
Stock secured mortgage
If you have investments in stocks then you can use the stock as security for a very favourable loan from your stockbroker. Many brokers offer low-interest loans to their clients as an extra service to get a competitive edge over other brokers. This allows you to keep your stock and still use them to finance your house. The brokers get to keep profiting from your trades and earn interest from the loan. It is a win-win situation. It is usually only blue-chip stocks that can be used as security for this type of loan. You can not use other securities such as penny stocks, binary options, cfd:s or Forex certificates.
Talk to your broker to see if they offer any stock-based loans that you can use to buy a house. If they do then it might be the cheapest loan available to you. If they don’t then it might be worth switching to another broker who does.