There are mainly 3 types of mortgage loans are available in the market.Here we explain each and every type briefly with examples.Just follow these different types of loans before you proceed in mortgage loans.
Mortgage credit market is characterized by standard products in the private market. They are not tailored to the needs of the individual customer. On the other hand, there are so many varieties of the standard solutions that makes it possible to the individual borrower to select precisely the loan that is best suited to his/her individual situation.
Standard products are cheaper than individually tailored solutions – and this helps stimulate competition where there is transparency in regard to prices and products. It also leads to higher flexibility, as it is easier for the borrower to replace one standard product with another. In the corporate market, there are bigger possibilities for tailoring individual solutions.
Here are the 3 different types of loans
Today, all long-term fixed-rate loans may be prepaid at a price of 100. This provides borrowers with a high degree of security. Without this option, the market price of the bonds could rise to much more than 100 if yields tumble. And that would make it expensive to buy the underlying bonds – they would be much more expensive than the borrower’s debt in nominal terms. The option of prepaying at a price of 100 also gives borrowers a higher protection against becoming technically insolvent if interest rates decline, leading to a rise in bond prices. A borrower is technically insolvent if the total mortgage debt exceeds the value of the property. Being technically insolvent is not a problem until a borrower needs to sell the property, because the sales proceeds will not cover the mortgage debt.
Adjustable-rate mortgages
However, the borrower does not know the future repayments as the interest rate will change throughout the loan term following interest rate resets. The interest rate is generally reset at a frequency of 1, 3, 5 or 10 years. The interest rate is reset when the underlying bonds are replaced by new bonds. The yield of the new bonds determines the loan rate for the period until the next interest rate reset. The lower initial loan rate should therefore be weighted against the risk that it will increase during the loan term. An ARM may be prepaid at a price of 100 in connection with each interest rate reset. Alternatively, the borrower may prepay the loan by purchasing the bonds on market terms – as with all mortgage loans.
Floating-rate loans
The reference rate of DKK-denominated loans is Cibor (Copenhagen Interbank Offered Rate), an interest rate which is quoted daily by the Danish central bank, Danmarks Nationalbank. It is possible to get a loan with a floating interest rate which cannot exceed a certain level (cap). This way, the borrower hedges against major interest rate increases. If a loan has a cap of 6%, the interest rate can never be higher than 6%. The loan rate will track Cibor, as long as it does not exceed 6%.
Mortgage credit market is characterized by standard products in the private market. They are not tailored to the needs of the individual customer. On the other hand, there are so many varieties of the standard solutions that makes it possible to the individual borrower to select precisely the loan that is best suited to his/her individual situation.
Standard products are cheaper than individually tailored solutions – and this helps stimulate competition where there is transparency in regard to prices and products. It also leads to higher flexibility, as it is easier for the borrower to replace one standard product with another. In the corporate market, there are bigger possibilities for tailoring individual solutions.
Here are the 3 different types of loans
- Fixed-rate loans
- Adjustable-rate mortgages
- Floating-rate loans - with or without interest rate cap
Today, all long-term fixed-rate loans may be prepaid at a price of 100. This provides borrowers with a high degree of security. Without this option, the market price of the bonds could rise to much more than 100 if yields tumble. And that would make it expensive to buy the underlying bonds – they would be much more expensive than the borrower’s debt in nominal terms. The option of prepaying at a price of 100 also gives borrowers a higher protection against becoming technically insolvent if interest rates decline, leading to a rise in bond prices. A borrower is technically insolvent if the total mortgage debt exceeds the value of the property. Being technically insolvent is not a problem until a borrower needs to sell the property, because the sales proceeds will not cover the mortgage debt.
Adjustable-rate mortgages
However, the borrower does not know the future repayments as the interest rate will change throughout the loan term following interest rate resets. The interest rate is generally reset at a frequency of 1, 3, 5 or 10 years. The interest rate is reset when the underlying bonds are replaced by new bonds. The yield of the new bonds determines the loan rate for the period until the next interest rate reset. The lower initial loan rate should therefore be weighted against the risk that it will increase during the loan term. An ARM may be prepaid at a price of 100 in connection with each interest rate reset. Alternatively, the borrower may prepay the loan by purchasing the bonds on market terms – as with all mortgage loans.
Floating-rate loans
The reference rate of DKK-denominated loans is Cibor (Copenhagen Interbank Offered Rate), an interest rate which is quoted daily by the Danish central bank, Danmarks Nationalbank. It is possible to get a loan with a floating interest rate which cannot exceed a certain level (cap). This way, the borrower hedges against major interest rate increases. If a loan has a cap of 6%, the interest rate can never be higher than 6%. The loan rate will track Cibor, as long as it does not exceed 6%.
These are the 3 basic mortgage loan types,if you want more information about these loan types then please leave a message in the below comment box.
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