However, most have certain things in common. Generally, mortgagees make monthly payments of both interest and principal. The early years of a mortgage are dominated by interest payments whereas the latter payments are more heavily weighted towards principal. If yo are uncertain of how the cash flows look, consider the following spreadsheet example . Traditional providers of mortgages are banks and savings and loans.
Mortgages tend to have long maturities and accordingly have high interest rate exposure.
Financial intermediaries have found many ways to lessen their exposure to this risk. For more on the types of mortgages , please check out these other notes. Mortgages are subject to two main risks. The risk of default and the risk of interest rate fluctuations. The credit-giving institution attempts to lessen default risk through diversification, credit checks, and appraisals.