As mortgage loans require borrowers to pledge collateral with lenders, it is a secured loan that is offered at attractive interest rates. A borrower may find it useful to take an idle property and put it into productive use by securing a loan against the value of the property. The borrower can use the funds for a variety of purposes.
Whereas a loan against property is a common form of a mortgage loan, there are different types of mortgage loans available such as.
Different Types Of Mortgage Loans Available:
- Adjustable-Rate Mortgage:
An adjustable-rate mortgage is a regular mortgage wherein the rate of interest is adjustable after a particular period. This allows the flexibility of a floating rate for the borrower whereas allows the bank to specify the rate or bind them to a particular rate for the initial period. An adjustable-rate mortgage would be beneficial for customers in a low-interest rate or declining interest rate regime allowing the customer to take advantage of declining rates.
- Reverse Mortgage:
A recently developing concept, reverse mortgage loan involves the process of mortgaging one’s house and receiving the payment from the financial institution for the same. However, the financial institution will be allowed to acquire or take over the house upon the death of the owners and dispose of the house in the market. This allows the owner to earn a regular stream of income whereas depending on the housing market, a financial institution may eventually benefit from the sale of the property.
- Interest-only Mortgage:
An interest-only mortgage is a scenario wherein the borrower would only pay interest and no principal would be repaid for the initial period. This facility is useful in a situation wherein the borrower is going through some financial problem and yet does not want to default or foreclose their property against the loan. The interest-only mortgage could be beneficial in a low-interest regime wherein the mortgage loan interest rates may not be very high. The repayment of principal at a later date on a monthly basis would be higher.
- Second-Mortgage Loan:
A second mortgage loan is akin to a top-up on an existing loan wherein a borrower may be facing the pinch to repay the original loan itself. The approval of a second mortgage loan is dependent on the history of the borrower as well as the value of the property. There might be scenarios wherein the value of the property may have risen exponentially allowing the customer to take benefit of the higher value. The borrower generally uses the top-up to partially repay the first loan and focus on paying the EMI thereafter.
- Loan Against Property:
The loan against property is the most common type of mortgage loan along with home loans. In a home loan, whereas a loan is taken at the initial stage of the purchase of the property and then slowly repaid, a loan against property is taken against an existing property and the proceeds used for a purpose other than the acquisition of a house. A loan against property has a large market in India and borrowers generally rely upon it for the usage of the loan for commercial purposes including the expansion of business. LAP generally has a floating interest rate structure whereas the rest of the terms are normal and plain.
- Other Mortgage loans:
A borrower may customize their mortgage loans as per their requirement if the financial institution is agreeing to do the same. Customization can be in the form of different modes of repayment like balloon payments, yearly payments, etc. as well as based on the rate of interest or the core form of the loan. Models like Lease Rental Discounting are also gaining prominence amongst retail borrowers.
Mortgage loans are a particular form of finance with a large market and allowing people to mobilize their assets into productive usage. Whereas vanilla or plain mortgage loans are generally used, evolving forms of mortgage loans give a chance to both borrowers and financial institutions to implement better systems.