COMMON MORTGAGE TYPES

Amortized

Adjustable and fixed rate

 

Variations in the structure of interest rate, term, payments, and principal payback produce a number of commonly recognized mortgage loan types. Among these are the following.

Amortized                   

Amortizing loan. Amortization provides for gradual repayment of principal and payment of interest over the term of the loan. The borrower’s periodic payments to the lender include a portion for interest and a portion for principal. In a fully amortizing mortgage, the principal balance is zero at the end of the term. In a partially amortizing loan, the payments are not sufficient to retire the debt. At the end of the loan term, there is still a principal balance to be paid off.

Negatively amortized loan. Negative amortization causes the loan balance to increase over the term. This occurs if the borrower’s periodic payment is insufficient to cover the interest owed for the period. The lender adds the amount of unpaid interest to the borrower’s loan balance. Temporary negative amortization occurs on graduated payment loans, and may occur on an adjustable rate mortgage.

Adjustable and fixed rate                     

Loans may have fixed or variable rates of interest over the loan term. Adjustable rate mortgages (ARMs) allow the lender to change the interest rate at specified intervals and by a specified amount. Federal regulations place limits on incremental interest rate increases and on the total amount by which the rate may be increased over the loan term.