Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower,
often in the form of a security (by means of a securitization). In the United States, the largest firms securitizing loans are Fannie Mae and Freddie Mac,
which are government sponsored enterprises.
Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is,
the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower);
that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital;
and the financial, interest rate risk and time delays that may be involved in certain circumstances.
There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage.
All of these may be subject to local regulation and legal requirements.
Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods;
the interest rate can also, of course, be higher or lower.
Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid.
Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.
Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases,
the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.
Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.
The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM) (also known as a floating rate or variable rate mortgage).
In many countries, floating rate mortgages are the norm and will simply be referred to as mortgages; in the United States,
fixed rate mortgages are typically considered “standard.” Combinations of fixed and floating rate are also common,
whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period.
Historical U.S. Prime RatesIn a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan.
In the U.S., the term is usually up to 30 years (15 and 30 being the most common), although longer terms may be offered in certain circumstances.
For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan,
although ancillary costs (such as property taxes and insurance) can and do change.
In an adjustable rate mortgage, the interest rate is generally fixed for a period of time,
after which it will periodically (for example, annually or monthly) adjust up or down to some market index.
Common indices in the U.S. include the Prime rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index (”T-Bill”);
other indices are in use but are less popular.
Rate Mortgage transfer part of the interest rate risk from the lender to the borrower,
and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive.
Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate;
the size of the price differential will be related to debt market conditions, including the yield curve.
Additionally, lenders in many markets rely on credit reports and credit scores derived from them.
The higher the score, the more creditworthy the borrower is assumed to be.
Favorable interest rates are offered to buyers with high scores.
Lower scores indicate higher risk for the lender, and higher rates will generally be charged to reflect the (expected) higher default rates.
A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term,
but the outstanding principal balance is due at some point short of that term. This payment is sometimes referred to as a “balloon payment” or bullet payment.
The interest rate for a balloon loan can be either fixed or floating.
The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is
amortized,
and Y is the year in which the principal balance is due.
Upon making a Mortgage Calculator for purchase of a property, lenders usually require that the borrower make a downpayment,
that is, contribute a portion of the cost of the property.
This downpayment may be expressed as a portion of the value of the property (see below for a definition of this term).
The loan to value ratio (or LTV) is the size of the loan against the value of the property.
Therefore, a mortgage loan where the purchaser has made a downpayment of 20% has a loan to value ratio of 80%.
For loans made against properties that the borrower already owns, the loan to value ratio will be imputed against the estimated value of the property.
The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan:
the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan.
