Mortgage Loans
A Mortgage loan is any loan made by a bank or other lending institution, in which the loan is secured by the borrower's equity in the home or property. The loan is made to a borrower who must prove to the lender that they have the ability to make the monthly payments at the specific interest rate offered by the lender. Mortgage loans generally carry competitive interest rates compared to other types of loans as the lender knows that the loan is secured by real property with proven market value -- thus less risk for the lender.
Mortgage lending is quite important to most nation's economies as it is the primary mechanism that drives residential property markets. In the absence of financial institutions lending money to borrowers to purchase property, the average individual would not be able to acquire and own property.
Mortgage Loans have two basic components; principal and interest. The principal amount of the loan is simply the amount borrowed. For instance, if a home is purchased for $300,000 and the borrower puts down 10% or $30,000, then the principal loan amount is $270,000. The interest portion on a mortgage loan -- in California or elsewhere -- is the amount that a borrower pays to the lender over time. The interest rate payment is calculated by taking the interest rate and the length of the loan, usually amortized from 10 to 30 years.
There are many variations on loans and they can be structured in many ways with different rates and terms.
What is an Adjustable Rate Mortgage?
An Adjustable Rate Mortgage (ARM) – also known as a Floating Rate or Variable Rate Mortgage – is a mortgage loan with a fluctuating (rather than fixed) interest rate. Adjustable Rate Mortgages are subject to periodic interest rate adjustments based on an index (an outside indicator of the prevailing interest rates in the market, such as interest rates on U.S. Treasury bills or the average national mortgage rate). These adjustments come at pre-determined regular intervals and may involve raising or lowering of the loan’s interest rate, depending on the changes in the market.
