Mortgage Loans: Meaning and Types
Procuring a loan requires you to pay a certain amount of interest to the lender. These additional pay–outs and processing fees are the major contributors to the cost of your debt. You can reduce the interest rate charged by your lender by offering them collateral. If you provide your property as security for the debt, you are said to have taken a mortgage loan. If you wish to know what does mortgage mean in detail, read on!What is the meaning of a mortgage?
A mortgage is an agreement between the lender and the person who borrows money. According to this contract, debtors pledge their property to the creditor to procure the loan, such as a house, commercial space, etc. If the debtor fails to repay the loan, the lender can sell the pledged property to compensate for the losses. In case of mortgage loan, you can avail a higher loan amount if you have a home insurance policy in place.
To completely understand what is a mortgage, you need to know that these debts are a form of secured loans. Hence, they charge you a lower interest rate than unsecured loans. You can also avail of mortgage loans for relatively longer tenures.What are the different types of mortgage loans in India?
Now that you know what is a mortgage, let’s understand the different types of mortgages that are available in our country:
Types of mortgages based on the contract between the debtor and the lender:
- Usufructuary mortgages
In a usufructuary mortgage loan, the borrower sells their property to the lender and allows them to receive an income from renting or leasing their property. The payment that the creditor earns can be adjusted against the debt repayments of the borrower.
- Simple mortgage loans
These are the most basic and popular mortgages available in the market today. In a simple mortgage loan, the debtor retains the ownership of their property. However, they give the right to the lender to sell their property if they default on their debt.
- Subprime mortgages
A subprime mortgage is offered to borrowers with low credit scores. These debts charge a higher interest rate and have few strict debt terms and conditions.
- English mortgages
These debts allow debtors to transfer the ownership of their property to the lender till the loan is completely repaid. Once the debt is cleared, the ownership is transferred back to the borrower. English mortgages charge a relatively low rate of interest.
Types of mortgage loans based on the interest rate levied by the lender:
- Fixed–rate mortgages
These are debts that charge a fixed mortgage rate, implying that the interest rate remains constant throughout the loan tenure. Since the interest rates do not fluctuate in this type of debt, you can easily plan your EMI payments and understand your resulting financial liability before procuring the loan.
- Variable–rate mortgages
Mortgage lenders that offer variable–rate mortgages charge an interest that varies depending on the repo rate declared by the apex bank of India, the RBI. These are majorly affected by the performance of the country’s economy and the stock market. Variable–rate mortgages are pretty beneficial in a growing economy. This is because as the country’s financial state strengthens, the interest rate charged by the lender decreases.
- Adjustable–rate mortgages
These are mortgage loans that charge a fixed rate of interest in the initial stages of the loan. After which, the interest rate changes depending on the performance of the Indian economy. Lenders that offer an adjustable–rate mortgage may charge a discounted rate of interest. However, these loans come with higher processing fees as well.