Debts and Mortgages
Debt is generally defined as the amount borrowed by one entity from another in terms of the agreement given in the debt indenture.
Mortgage is the lender’s security for a debt so that the loan is secured by the value of the security pledged. It is a debt instrument which is secured by the collateral that the borrower is obligated to pay back with the predetermined cash flows. The security put as collateral is to secure repayment of a loan. It can be used to offset the loan if the borrower defaults in making the payment of the principal and interest as agreed in the terms while raising the debt.
Types of Mortgage
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Fixed-rate mortgage
In this kind, the interest rate on the borrowed amount remains fixed throughout the bond contract life. This is the most preferred method for the homeowner as a borrower because the borrower will not have to contend for varying amount of the loan payment which would fluctuate with interest rate payments
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Adjustable-rate mortgage (ARM)
In this kind of debt, the rate of interest to be paid on the outstanding balance keeps varying with the associated benchmark index. The interest to be paid under ARM scheme constitutes the benchmark rate and an additional spread known as interest margin
