Mortgage Loans
Home mortgages in today's market come in many different types, but they generally fall into one of two broad categories as follows:
- Fixed rate mortgages (FRMs); or
- Adjustable rate mortgages (ARMs).
The meaning of these home mortgages is explained below, including popular options within each type such as interest-only mortgages and flexible payment mortgages.
Fixed Rate Mortgages (FRMs)
Fixed rate mortgages specify the interest rate which is to apply for the full term of the loan. This means that the mortgage lender is not able to increase the rate of interest which applies to the mortgage at any time. But it also means that the borrower is not able to reduce the interest rate for so long as any balance on the mortgage remains outstanding. Unless the mortgage is a special type of FRM (such as one which specifies low initial payments followed by increasing payment amounts), then not only is the interest rate fixed for the entire loan term, but the payments are fixed also.
A consequence of fixed rate mortgages is that the mortgage is fully and exactly repaid at the point at which the final payment occurs at the end of the designated loan term.
The loan term for fixed rate mortgages can vary widely. The most common term is 30 years, but 15-year FRMs are prevalent also. However, borrowers can negotiate alternative periods from as short as 10 years or less to periods which extend to 40 years or more.
An increasingly popular version of FRMs in recent years is the interest-only mortgage. This is a mortgage which, for a specified initial period, has payments which only cover the interest which accrues on the loan amount. No amount of principal is included in the mortgage payment, which means that payments are initially lower but the principal outstanding does not reduce for the interest-only period. After the specified interest-only period the mortgage reverts to a normal FRM, so payments increase due to the addition of repayments of principal.
Home mortgages which have a fixed interest rate have the advantage of providing certainty to borrowers regarding future payment amounts, right to the end of the mortgage term.
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