Mortgage Loan

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Explanation:

A mortgage loan is specifically the amount of debt borrowed by pledging a real or existing property as collateral or security for assuring repayment of the amount. Mortgage loans are time bound – usually long term – say about 30 years period, within which the amount of loan is to be repaid along with interest thereon. The loan is amortized on pre-fixed installments, normally every month. The rate of interest is also determined at the time of lending, calculated for the period of repayment and added along with the monthly repayment amounts equally. Mortgage loans are generally borrowed by individuals for acquisition of certain properties either for their own use or for resale, without resorting to the necessity of utilizing or mobilizing their own resources for the transaction. Mortgage loans are commonly prevalent in U.S.A. where the government is encouraging private ownership of housing properties by their citizens for self-sufficiency.

Salient features of Mortgage Loans:

Mortgage loans are essentially entailing foreclosure of the term of the loan by the lender - generally Banks, Government agencies like the Department of Housing and Urban Development (HUD), Insurance companies and private institutions - in the event of default of repayment by the owner of the property, to get back the amount of mortgage loans. While the interest of the lender is to be protected always, the process of mortgage lending is monitored constantly by the respective governments to prevent any malpractices. The government intervention may be direct through specific legal aspects to be followed in mortgage lending, indirect by regulatory measures imposed on banks and financial institutions for lending. The federal governments of U.S. are even creating their own entities for extending mortgage loans at reasonable rates of interest for encouraging homeless citizens to get the homes of their own – like HUD and housing cooperative societies.

The lending institutions are raising funds through issue of public bonds and securities on payment of interest and are re-cycling the same to the borrowers for steady income. The U.S. government is entrusting the mortgage loans to other enterprises of its own for collection by selling the same as securities.

Types of Mortgage Loans:

Even though various types of mortgage loans are adopted in all countries, depending upon the customs and usages being followed for years together, the basic principles of mortgage loans are common. The object is to rotate the financial resources available in the formidable real estate sector, where the risk factor on loan is minimal because of the security of the properties. In U.S. investors are encouraged to pool their resources into buying the securities floated by the lending institutions to gain a steady source of less-risk income and on the other hand the basic need of its citizens to have their own homes is also fulfilled. Basically the mortgage loans can be divided into two sections depending on payment of interest:

1) FRM – Fixed Rate Mortgage
2) ARM – Adjustable Rate Mortgage (or floating rate mortgage).

If throughout the term of the loan (15 or 30 years normally in U.S.) simple interest is charged at a fixed rate and added to the principal, this is FRM. Alternatively if the interest rate fluctuates during the term and goes up or down, the option of ARM is also given to the borrower to choose.

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