What are the different types of loans and mortgages?

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Answered by: Camille, An Expert in the Loans and Mortgages Category
Loans and mortgages are some of the most common types of credit. However, not many individuals have the ability to compare and differentiate the two. A mortgage is basically the type of credit that is secured with personal property or real estate. On the other hand, a loan is an agreement between a creditor and a debtor. The money given by the lender to the borrower is what is commonly referred to as a loan.

A mortgage is often tied to property owned by the debtor. This includes homes or land. Both lines of credit are often structured between individuals, firms or groups. In this case, an individual gives another individual or entity money, which needs to be paid within a specified period. More often than less, an interest is levied on the principal amount. Besides this, loan agreements are usually signed between the parties that are involved. Such agreements contain terms of the loans, and repercussions that come with missed payments. Such information is often included in the agreements to cushion both debtors and creditors from financial ruin.

What are the Different Types of Loans and Mortgages?

Loans are generally categorized as open end or closed end, and secured or unsecured. If you opt for open end loans, you can borrow additional amounts once you start making repayments. This is not applicable when it comes to closed end loans. Secured loans are usually attached to assets so that financial losses can be recouped if there is a default in repayments. Unsecured loans are never attached to borrowers’ property.

Mortgages are categorized as fixed rate, and adjustable rate mortgages. Fixed rate mortgages are often paid over a long time. The repayments that borrowers make are of equal amounts. In adjustable rate mortgages, borrowers can make varying payments depending on their present financial status.

Common Terminologies Used

There are a number of terminologies, which are applicable both forms of credit. Having a clear understanding of these terminologies ultimately helps borrowers to establish everything that pertains to either borrowing loans or mortgages. Below are three of the most common terms used in these transactions.

1. Principal

This is the initial amount that is borrowed from the lender, minus any interest. For instance, if an individual borrows a 5,000-dollar loan and pays back 3,000 dollars, the principal is 2,000 dollars. This does not take into account interest that might accrue over and above the remaining 2,000 dollars that is still owed to the lender.

2. Interest

This refers to the fee charged by creditors for debtors to borrow money. Interest payments often encourage creditors to overlook the financial risk that comes with lending money. This is because the idyllic scenario often results in creditors recouping all the money that they loaned out in addition to some percentage on top of that.

3. Lien

This is an item of monetary value, which is often used as security. Mortgage lenders often require borrowers to provide liens. This is usually in the form of an asset or property. Lenders are legally obligated to dispose of the attached property at auctions to recoup monies owed to them in the event that borrowers default making repayments.

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