Mortgages: What you need to know

A mortgage is legal agreement or contract that says that a party has agreed to put up a property, a house or a piece of real estate, as security to get a loan. By doing this, the person getting a loan can buy a piece of property that he initially cannot afford. Still, if by any chance, he cannot pay for the loan, the bank will have to foreclose the property and resell it to others.

The lender will hold the title of the property until after the full amount of the loan is paid for plus interest. Depending on the terms of the loan, repayment can last until a couple of years. Two of the most common mortgages in the country are the fixed-rate mortgage and the adjustable-rate mortgage.

As shown by the name, fixed-rate mortgage has an interest rate that stays the same all throughout the life of the loan. If for example the loan is termed for 10 years, then the interest rate will stay fixed regardless of the increase or decrease of the market rates.

With adjustable-rate-mortgage, the interest rate can change at the end of the pre-determined intervals. For instance, if the agreement says interest change in periods of six months, then the rate will assume the market rates after the six months period. With this kind of mortgage, the borrower is left at the mercy of the market rates. Neither the lender nor the borrower can dictate the interest rates that will be given. Still, to protect both the lender and the borrower, most adjustable-rate mortgages have interest rate cap that protects them from too much increase or decrease of interest rates.

The balloon mortgage is another kind of mortgage, though not quite as popular as the first two. In the balloon mortgage, borrowers are allowed to make fixed amount payments for a certain period of time and then make one large payment referred to as a balloon payment towards the end of the loan. This is actually a great deal especially if you are planning to eventually sell off the property or to refinance it to buy another.

The graduated payment mortgage is also similar to the balloon mortgage except that the borrower is not required to make a large payment at the end of the payment period. What is often done with graduated payment mortgage is to start off the payments with really small amounts. The payments will then gradually increase until they reach a point of stabilization.

Knowing how much Americans need homes, the United States government has enacted several government program which would help borrowers obtain mortgages while lessening the risks for the lenders. That way, more and more Americans will be given the opportunity to own houses or other piece of real estate. The Federal Housing Administration for instance offer low and moderate-income borrowers obtain loans by giving banks and other lending institutions protection and benefits. Borrowers can also avail of a mortgage insurance, which would ensure that the FHA will pay for the difference in case the house is sold for less that it was originally worth.

Another government agency, which provides programs for mortgages is the Veterans Administration, which helps qualified veterans get a loan. If in case the loan is not paid in full, the VA will shoulder the balance of the loan.