A mortgage is a popular type of loan taken by people all over the world to fund purchase of different items like a property, vehicle etc. When a person pledges his property as security and takes a loan to pay off the outstanding cost of the property, then he is said to have taken a home mortgage. A home mortgage is taken usually for 30 years although it is possible to pay off the loan earlier. The idea in lenders offering a home mortgage is that if the borrower defaults on payments over a certain period, the lender can take over the property.

The basic components of a mortgage are:
• Property
• Mortgage
• Borrower
• Lender
• Principal
• Interest
• Foreclosure.
The property is the physical residence that the borrower is using to get a home mortgage. The mortgage is the restrictions the lender will place on the property preventing the disposal of it by the borrower while it is under a mortgage. Some of the restrictions are the need to purchase mortgage and home insurance or even pay off existing mortgage before disposing the property.

The borrower is the one who owns the property and is taking a home mortgage on it. The lender can be a financial institution or a bank who will give a loan to the borrower based on certain terms and conditions. The principal is the amount of the loan taken by the borrower, which will not include the initial down payment he makes. The interest is the charge on the loan and is fixed based on market trends and other economic factors. If a borrower defaults on his payments or due to other circumstances, the lender can repossess or foreclose and seize the property.

If the property is seized, the lender can sell it and recover the money outstanding that’s pending from the borrower. The two popular type of home mortgages are fixed rate mortgage (FRM) and adjustable rate mortgage (ARM). As the name indicates, with FRM the interest rates are fixed and will not change throughout the term. The borrower will know the amount of money that is to be owed by him. With FRM, there is no varying rate of interest to the borrower.

In ARM type of mortgage the rate of interest can fluctuate based on the market index. Borrower here is taking a chance, considering he could save money, if the market index goes down and will lose money if the market index goes up. Yet another type of mortgage is called balloon mortgage. In this type, the borrower actually pays very small regular payments for a set number of years before assuring to make a large payment amount after a certain time.

A borrower can opt for a balloon mortgage if he plans on refinancing his property or hopes to get a cash windfall – e.g. inheritance, expected dividend or a tax refund – sometime in the future. He can use this money to repay the existing mortgage therefore saving initially by making smaller payments. There are several merits and demerits of going for a balloon mortgage. Studying them in detail will help a borrower make the right decision. Always remember to use a mortgage calculator to estimate the rates of whatever the type of mortgage you plan to take.

Mortgage calculator will not only tell you how much the borrower needs to pay each month, there are other sophisticated mortgage calculators that can even provide an estimate on the property worthiness, refinancing option etc. Balloon mortgage offers very low down payment compared to conventional mortgages. Also, lower interest payments are made in balloon mortgage and it can be transferred to regular mortgage option if the expected lump sum fails to turn towards the borrower’s favor. Make sure all these items are analyzed properly before choosing for balloon mortgage.

The major disadvantage with a balloon mortgage is that the final payment will be extremely large. The borrower must be absolutely certain he will have that amount coming to him in the future before going in for this mortgage. A balloon mortgage is not a good option if you plan on refinancing for then the interest costs could be high. So, check on various variables of this and other home mortgages seeking advice from an expert before deciding on which option to choose.

Article by John Hoots of Chicago, who is a specialist in mortgages. For more information on Chicago home refinance, visit his site today.