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13: MORTGAGES

13

MORTGAGES

A mortgage is a loan with real estate pledged as collateral. If the borrower defaults on the loan, the lender has first claim upon the real estate. The pledged real estate can be residential property or commercial property.

Interest rates on mortgages can be fixed over the life of the mortgage (fixed rate) or the interest rate may be tied to some interest rate index and vary over time (called variable rate, floating rate, or adjustable rate). With fixed-rate mortgages, the lender bears the risk of changing interest rates. With floating-rate mortgages, the borrower bears the risk of changing interest rates. The interest cost is lower, on average, for floating-rate loans. The fixed-rate borrower pays a higher interest cost to lock-in the interest cost.


  

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