Home Mortgage Loan - What Is Amortization and How Does It Work?

A mortgage is actually a loan from an institution or other financial organization that assists a borrower buy a property. The most important thing about a mortgage in order to understand is that it is secured by real property. This means that if the homeowner defaults on the mortgage and does not pay back the loan, then the financial institution can repossess the property and recover its value. This is important to understand in that it illustrates the reason why getting the most out of a mortgage can be worth it.

In order to understand what is mortgage and how it relates to interest rates, an applicant should first consider the two types of mortgages that are available: an adjustable-rate mortgage (ARM) and a fixed-rate mortgage (FRM). With the ARM, the interest rate can temporarily rise above zero, which can result in increased monthly mortgage payments. For this reason, these mortgages tend to be short-term loans. An adjustable rate mortgage (ARM) is often tied to interest rates of major currencies. If the dollar drops in value, so does the interest rate on the mortgage. Because of this, the homeowner may benefit from lower monthly payments, but also see their overall debt increase significantly.

An important point to note about mortgage loans is that the amount that is paid back over time varies greatly, depending on many factors including the type of loan term applied to the mortgage, the amount of the initial loan, down payment made and other fees associated with the mortgage loan. It is very common for individuals to carry a mortgage for five, ten or twenty years. However, as with any loan, there are advantages and disadvantages associated with each. Usually with an adjustable-rate mortgage (ARM), a lower monthly payment is initially required, however after the initial loan term has expired, the monthly payment can increase significantly. In some cases, an amortization calculator can help consumers determine the pros and cons of different loan terms and amortization programs.