What is a mortgage?
How to Know You're Ready for a Mortgage

As you may have guessed, here in The Truth About Mortgage we're often faced with the question of what's a mortgage. Fortunately, the definition of mortgage also has a somewhat amusing origin. You've no doubt heard the term tossed about a thousand times before. But even if you don't know the full expression, you're likely still familiar with the basic meaning. In short, a mortgage is an investment for the future, typically used to secure the purchase of a home.

Mortgages are secured loans. This means that you put up some collateral - your home, for example - to secure the loan term. When you pay off the mortgage early, you lose your collateral; however, if you don't pay off the mortgage on the agreed term, you can lose your home to foreclosure. For that reason, mortgages are usually interest-only loans. You pay down the loan term gradually, with the amount that you pay towards the principle growing each month.

These interest only mortgages come in two flavors: federal and fixed-rate. Federal mortgages are the norm. These tend to be the most secure of all mortgages because the government owns the lender, which provides the security for the loan. If the government decides to start repossessing homes left in foreclosure, they use these mortgages to bail out mortgage lenders, thus keeping the property in their control.

Fixed-rate mortgages tend to be more risky; remember those adjustable-rate mortgages that were so popular a few years back? The risk comes from the fact that the interest rate may rise suddenly if the federal government decides to stimulate the economy by raising interest rates. That's why fixed-rate mortgages are usually only offered to people with excellent credit.

In contrast, adjustable rate mortgages are risky because lenders could raise the interest rate at any time. It is basically a loan with an interest rate that changes, and lenders have no control over this variable. In essence, the borrower is paying whatever the market charges on his mortgage.

If you don't qualify for either option, you can combine the two to get the best deal. You can take advantage of low interest rates and long terms by opting for a fixed-rate mortgage. If you're planning on living in your home for the entire life, this could be a great option for you. As for the length of your loan, it entirely depends on the value of your home, your income, and the interest rate you qualify for.

The other option is a refinancing program. If you can qualify for the programs offered by the federal government, your mortgage rates will be lower. This type of loan type allows you to combine your payments into a single loan payment. Depending on your income, you may qualify for a substantial tax reduction. The federal government offers the lowest mortgage rate available, and most people qualify for this option.

As you can see, a 30-year fixed mortgage is a great option for homeowners who want to keep the monthly payments affordable, while making sure that the principal balance does not exceed the amount of equity in their home. When you refinance, you will end up paying lower monthly payments over the life of the loan, even if the principal balance increases. You also reduce the risk to your credit by locking in a low interest rate. This type of loan is ideal for homeowners who are planning on living in their homes for the long term.

Another option to consider is the 30-year amortization plan. Here, you pay off your initial mortgage loan in three to five years. Then, you will pay an extra amount every month for the first ten years, and then, the loan term will decrease. By the time you reach the end of the loan term, you should have paid off the principal. There are advantages to this type of loan term, but the disadvantage is that you will have to pay more taxes due to amortization.

Private mortgages are another option for those homeowners who do not qualify for the federal program or the mortgage plan provided through your home-owners association. In private mortgages, the lender will set the term, or term length, at any given point up to five years. The lender will then calculate the amortization, which includes interest and principle. The lender may increase the interest rate during the initial period of the mortgage, up to five percent, so the payment amount can be adjusted each year.

Fixed-rate mortgages, as well as most third mortgages, came in two forms: a tracker mortgage and a compound mortgage. With the fixed-rate mortgage, the lender does not adjust the interest rate or the payment amount; however, the borrower does. To make the loan payment, borrowers must budget accordingly; meaning, they must know exactly what they will spend each month to make the mortgage payment. To do this, borrowers must carefully consider all factors involved before selecting the mortgage product.

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