Term Mortgage

Definition

A term mortgage is a specific type of mortgage loan in which the borrower agrees to pay only interest or a combination of interest and a small portion of the principal over a set term. At the end of this term, the entirety of the principal sum must be paid off either through refinancing, selling the property, or paying off the loan in a lump sum, depending on the agreement. Term mortgages are often counted among the short-term loan types and generally stretch over one to ten years.

Examples

Five-Year Fixed-Rate Mortgage: A borrower obtains a mortgage with a five-year term and negotiates a fixed interest rate of 3.5%. Over the five years, interest payments are made regularly, and at the end of the term, the borrower needs to pay off the remaining principal in full or opt for refinancing.
Balloon Mortgage: A borrower takes a ten-year term mortgage agreement where monthly payments cover interest only. After 10 years, a balloon payment—a single large payment—is due, covering the entire remaining principal.

Frequently Asked Questions (FAQs)

What happens at the end of a term mortgage?

At the end of a term mortgage, the borrower must repay the remaining principal amount in full. This can be done by paying it out of pocket, selling the property, or taking out a new loan to refinance the remaining balance.

Can term mortgages be extended or refinanced?

Yes, term mortgages can often be extended or refinanced before they come due. Borrowers typically look for favorable terms on new loans as the maturity date approaches.

What are the typical interest rates for term mortgages?

Interest rates for term mortgages vary based on market conditions and the borrower’s creditworthiness. They are usually fixed for the term agreed upon but can be variable in some cases.

What is a balloon payment in a term mortgage?

A balloon payment is a large, lump sum payment due at the end of the loan term, covering the borrowed principal. This is common in interest-only mortgages.

Are term mortgages different from traditional, long-term mortgages?

Yes, term mortgages involve simpler interest structures and shorter borrowing periods, focusing on partial principals, while traditional mortgages often span 15 to 30 years with regular principal and interest payments.

Balloon Payment

A large, lump sum payment made at the end of a loan’s term to pay off the remaining principal.

Fixed-Rate Mortgage

A mortgage with an interest rate that remains unchanged for the entirety of the loan term.

Interest-Only Mortgage

A type of mortgage where the borrower pays only the interest for a specific period, followed by payments on both principal and interest.

Refinancing

Taking a new loan to pay off an existing mortgage, usually with better terms.

Loan Agreement

A formal document outlining the terms and conditions between a borrower and lender.

Online Resources

References

Ross, S.A., Westerfield, R.W., & Jaffe, J. (2016). Corporate Finance. McGraw-Hill Education.
Brueggeman, W.B., & Fisher, J.D. (2015). Real Estate Finance and Investments. McGraw-Hill Education.

Suggested Books for Further Studies

“Real Estate Finance and Investments” by William B. Brueggeman and Jeffrey D. Fisher.
“The Real Estate Wholesaling Bible: The Fastest, Easiest Way to Get Started in Real Estate Investing” by Than Merrill.
“Rich Dad Poor Dad” by Robert T. Kiyosaki – Essentials on financial literacy including real estate investing basics.

Real Estate Basics: Term Mortgage Fundamentals Quiz

### What is a term mortgage primarily characterized by? - [x] A set period of years for which the mortgage is valid - [ ] Variable interest rates over the mortgage period - [ ] Payment reductions at the end of the mortgage term - [ ] Mortgage guaranteed by a co-signer > **Explanation:** A term mortgage is mainly characterized by a predetermined period after which the mortgage matures, typically ranging from one to ten years. ### Which payment is due at the end of a Balloon Mortgage term? - [ ] Minimal payment remaining - [x] Large lump sum payment - [ ] No payment due - [ ] Monthly payment increase > **Explanation:** In a balloon mortgage, a large lump sum payment is due at the end of the term to cover the remaining debt. ### Which of the following terms is synonymous with a large payment due at the end of the mortgage term? - [ ] Instalment Payment - [ ] Lump-Sum Acceleration - [x] Balloon Payment - [ ] Principal Reduction > **Explanation:** A balloon payment refers to a large, lump sum payment made at the end of the loan term. ### Typical term mortgages have what length? - [ ] 15 to 30 years - [ ] Less than one year - [x] 1 to 10 years - [ ] More than 30 years > **Explanation:** Term mortgages generally last between 1 to 10 years, as opposed to long-term mortgages, which usually span 15 to 30 years. ### What is a likely course of action at the end of a term mortgage? - [x] Refinancing the remaining principal - [ ] Foreword agreement to remove the principal - [ ] Interest payment elimination - [ ] Co-signer taking over payments > **Explanation:** Borrowers often refinance to cover the remaining principal at the end of the term mortgage. ### What differentiates an interest-only mortgage under term mortgages? - [ ] Principal is dissected annually - [ ] Higher initial payments - [x] Only interest payments are made for a set period - [ ] Total cost consolidation > **Explanation:** An interest-only mortgage requires only the interest to be paid for an initial period, postponing principal payments. ### In what scenario might a borrower prefer a term mortgage? - [x] Expecting an increase in income/capital - [ ] Volatile job market conditions - [ ] Constant expense control - [ ] Fixed-term rental yield > **Explanation:** Borrowers expecting increased income or capital gains may favor term mortgages to manage initial lower payments. ### Which option does not apply to a term mortgage? - [ ] Full principal payment at the term end - [ ] Refinancing possibilities - [x] Permanently fixed low payments - [ ] Balloon payments > **Explanation:** A term mortgage involves full principal repayment potentially requiring balloon payments, not constant low payments. ### When utilizing a term mortgage, which aspect is often constant throughout the term? - [ ] Principal repayment installments - [ ] Risk mitigation strategies - [x] Interest rates (if fixed) - [ ] Payment similarity in subsequent mortgages > **Explanation:** Most term mortgages use fixed interest rates throughout the term, dictating consistency in interest payments. ### What is an often required feature of a property involved in a term mortgage? - [ ] Resale to a stipulated buyer - [x] Designed usage as collateral - [ ] Threat assessment evaluation - [ ] Immediate freehold transfer > **Explanation:** Properties under term mortgages are generally used as collateral to secure the loan betting the principal repayment.

This structured approach provides a strong foundational understanding of term mortgages for those interested in the dynamics of real estate financing.