Mortgage: Loans and Types
Updated on : Feb. 25, 2023 - 6 p.m. 17 min read.
Purchasing a home is one of the biggest investments you'll ever make. And if you're like most homebuyers, you'll need to secure a mortgage loan to finance your purchase. With so many different types of mortgage loans available, it can be overwhelming to determine which one is right for you. That's why we've created this comprehensive guide to mortgage loans. In this guide, we'll explore the different types of mortgage loans available, including conventional loans, FHA loans, VA loans, and more. We'll also delve into the pros and cons of each type of loan, and provide expert tips to help you make an informed decision. Whether you're a first-time homebuyer or a seasoned pro, this guide will provide you with the knowledge and tools you need to navigate the world of mortgage loans and secure the best loan for your needs. So let's get started!
A mortgage is a loan obtained from a financial institution, such as a bank or a credit union, that is used to purchase a property, such as a house or a condominium. The borrower agrees to repay the loan over a fixed period of time, typically 15 or 30 years, with interest.
When someone applies for a mortgage, the lender will assess the borrower's credit history, income, and other financial factors to determine whether they are eligible for the loan and what interest rate they will be charged. The lender will also require the borrower to make a down payment, which is a percentage of the total purchase price of the property.
The property being purchased serves as collateral for the loan, meaning that if the borrower fails to make the required payments, the lender may foreclose on the property and sell it to recoup their losses.
Mortgages can be either fixed-rate or adjustable-rate. With a fixed-rate mortgage, the interest rate remains the same throughout the life of the loan, while with an adjustable-rate mortgage, the interest rate may change periodically, depending on market conditions.
Overall, a mortgage is a major financial commitment, and borrowers should carefully consider their options and their ability to make payments before taking out a loan.
Different types of mortgages:
In India, there are several types of mortgages that are offered by banks and financial institutions. Some of the most common types of mortgages in India are:
- Home Purchase Loan: This is the most common type of mortgage in India, which is used to buy a new or resale residential property. The loan amount can be up to 80-90% of the property's market value, and the repayment tenure can be up to 30 years.
- Home Construction Loan: This type of loan is used to finance the construction of a new home. The loan amount is usually disbursed in stages, based on the progress of the construction, and the repayment tenure can be up to 30 years.
- Home Improvement Loan: This loan is used to finance home renovation, repair or extension works. The loan amount can be up to 80-90% of the estimated cost of the renovation or repair, and the repayment tenure can be up to 20 years.
- Loan Against Property (LAP): This type of loan is taken against the mortgage of a property that is already owned by the borrower. The loan amount can be up to 60-70% of the market value of the property, and the repayment tenure can be up to 15 years.
- Reverse Mortgage Loan (RML): This is a loan offered to senior citizens who own a residential property. Under this scheme, the borrower can mortgage their property to the lender and receive a regular stream of income. The loan amount is usually up to 60% of the property's market value, and the repayment is done after the borrower's demise or when they sell the property.
It's important to note that the terms and conditions of each type of mortgage may vary from lender to lender. Borrowers should carefully evaluate the terms and conditions of each option and choose the one that suits their needs and financial situation.
There are several different types of loan structures that borrowers can choose from, depending on their needs and financial situation. Here are some of the most common types of loan structures:
- Fixed-Rate Loans: These loans have a fixed interest rate throughout the loan term, which means that the borrower's monthly payment will remain the same. This type of loan is ideal for borrowers who want a predictable payment structure and don't want to worry about interest rate fluctuations.
- Adjustable-Rate Loans: These loans have an interest rate that can change over time, based on market conditions. The borrower's monthly payment may increase or decrease, depending on the changes in the interest rate. This type of loan is ideal for borrowers who are comfortable with some level of risk and want to take advantage of lower interest rates in the short term.
- Interest-Only Loans: With an interest-only loan, the borrower only pays the interest on the loan for a certain period of time, typically 5-10 years. After the interest-only period ends, the borrower must start repaying both the principal and the interest. This type of loan is ideal for borrowers who need to lower their monthly payments in the short term and can afford to make higher payments later on.
- Balloon Loans: These loans have a large final payment, called a "balloon payment," that is due at the end of the loan term. The monthly payments are typically lower than other loan structures, but the borrower must be prepared to make a large payment at the end of the term. This type of loan is ideal for borrowers who expect to have a large lump sum of money available at the end of the loan term.
- Bridge Loans: These loans are designed to bridge the gap between the purchase of a new property and the sale of an existing property. The borrower takes out a short-term loan to cover the down payment and other costs associated with the new property, with the expectation that they will be able to pay off the loan when they sell their existing property.
- Secured Loans: These loans require the borrower to put up collateral, such as a house or car, in order to secure the loan. If the borrower defaults on the loan, the lender can seize the collateral to recover their losses. This type of loan is ideal for borrowers who have valuable assets to use as collateral and want to borrow a large amount of money.
- Unsecured Loans: These loans do not require collateral and are based solely on the borrower's creditworthiness. The interest rates on unsecured loans are typically higher than secured loans, and the loan amounts are usually smaller. This type of loan is ideal for borrowers who don't have collateral to put up and need to borrow a smaller amount of money.
It's important for borrowers to carefully consider the terms and conditions of each type of loan structure and choose the one that best fits their needs and financial situation.