Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Home Mortgage

What it is:

A home mortgage is a loan secured for a house. The borrower is usually obligated to make a predetermined series of payments on the loan.

How it works (Example):

Home mortgages generally range from 10 to 30 years. The two main types of home mortgage loans are fixed rate and adjustable rate. In a fixed-rate mortgage, the interest rate and the periodic payment are generally the same each period. In an adjustable-rate home mortgage, the interest rate and periodic payment vary. Interest rates on adjustable-rate home mortgages are generally lower than fixed-rate home mortgages because the borrower bears the risk of an increase in interest rates.

To request a home mortgage, the borrower submits an application and information about his or her financial history to a lender. This is done to give the lender reasonable assurance that the borrower will repay the loan. Occasionally, a mortgage broker is used to help a borrower choose a lender. At the end of the loan process, lenders commonly charge closing costs as compensation for preparing the home mortgage documents and performing other services.

When the borrower and the lender agree on the terms of the home mortgage, the lender puts a lien on the home as collateral for the loan. This lien is recorded in public records. If the borrower defaults on a home mortgage, the lender may take possession of the house, which is called foreclosure.

Home mortgage payments are typically composed of principal, interest and a portion of annual property taxes, private mortgage insurance, and property insurance. Other assessments may be included in the periodic payment.

Mortgage loans are often customized to meet lending or borrowing needs. For example, it is common for a home mortgage to carry a fixed rate for a certain period and then revert to an adjustable rate. Some loans may incorporate balloon payments, where smaller periodic payments are made in return for a large payment due at some point.

Why it Matters:

Home mortgage lending provides a way to purchase a home without paying the full price up front. Changes in home mortgage interest rates generally affect housing demand, which affects the construction and many other industries.

It is important to note that some cultures prohibit the payment or receipt of interest. In these cases, Islamic mortgages are used, which involve having the property change hands twice. Often, the lender will purchase the house for the borrower and then act as a landlord. The borrower in this circumstance will pay rent and make a periodic contribution toward the purchase of the property. As with a traditional home mortgage, when the last payment is made, the property belongs to the borrower. Alternatively, the lender may resell the property to the borrower in an installment plan for a price higher than the original price.

A lender may sell a borrower's home mortgage. The sale of mortgages gives banks and other lenders cash to make new loans. Government sponsored entities such as the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC) routinely purchase home mortgages and then sell mortgage-backed bonds to investors.

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