|By Jeff Miles on January 23, 2010
Even though many housing-related terms are constantly thrown around in the media and popular usage, very few people actually understand what they mean. Take the word “mortgage” for example. When most people use the term “mortgage” they are referring to a mortgage loan. What does this mean? A mortgage loan is basically a loan used to purchase property. The loan is secured by real property, so if you don’t make your payment, the bank can take your property from you in a process called foreclosure.
The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, outlines several main types of mortgages on its website: fixed-rate mortgages, adjustable-rate mortgages, balloon mortgages, and reverse mortgages, two of which are discussed briefly below.
Interest rates on mortgages vary by city and state, and by the type of loan; one typically pays off his or her mortgage monthly over a 15-, 20-, or 30-year period, although other payment options are available.
Fixed-rate mortgages are generally considered standard in the United States. Their low-risk nature makes them especially popular for first-time homebuyers, as does the fact they offer a certain amount of protection against inflation. What is meant by “protection against inflation” is that even if interest rates go up, your monthly payment won’t; it will remain this same. The downside of this, however, is that if interest rates go down, your monthly payment will also remain the same, unless you decide to refinance.
Adjustable-rate mortgages (abbreviated ARMs) have received much attention lately because of the housing crisis. They are different from fixed-rate mortgages in that the interest rate often changes over the course of the loan. They are attractive mainly because they often start out with a low interest rate (and thus a low monthly payment) and because there is the potential for the interest rate to go down. With these types of loans, consumers should be aware that the chances of the interest rate going down are low and that lenders often use teaser rates—rates that are artificially low and only in effect for the first months of loan—to attract consumers.