Mortgages are one of the most common types of debt in the United States. With so many people owning homes, it’s important to understand how mortgages work and the different types of mortgages available.
In its simplest form, a mortgage is a loan used to purchase a home. The borrower agrees to pay back the loan with interest over a set period of time. Mortgages are typically secured loans, meaning that the house itself is used as collateral—if the borrower fails to repay the loan, the lender can repossess the house.
The two main types of mortgages are fixed-rate mortgages and adjustable-rate mortgages (ARMs). Fixed-rate mortgages have an interest rate that remains the same for the life of the loan. ARMs have an interest rate that changes, usually on a yearly basis, based on an index such as the U.S. Prime Rate or the London Interbank Offered Rate (LIBOR). The initial interest rate on an ARM is typically lower than on a fixed-rate mortgage, though it can fluctuate over time.
When applying for a mortgage, lenders will consider several factors including your credit score, income, and debt-to-income ratio. This information helps lenders determine how much money you can safely borrow and whether you’ll be able to make the payments on time.
If you’re thinking about purchasing a new home, it’s important to do your research and compare different mortgage options to find the right one for you. With so many options available, it’s important to work with a qualified mortgage broker or lender to ensure that you get the best rate and terms for your situation.