Mortgage Loan Basics
Types of Home
Loans
Back To Top
Mortgage
Loan Definition
A mortgage loan
is a long-term loan for which the house and land you are buying
are used as collateral. If you aren’t able to meet the terms of
your mortgage, the bank or lending agency can take your house.
It’s important when you are shopping for a loan to make sure that
you balance the kind of house you want against the mortgage
payment you can afford.
The main difference between
first-time loans for houses is the amount of interest charged and
how long the loan lasts. Most mortgages have 15 or 30-year terms,
and the payment will include money for the principal, interest,
taxes and insurance (unless your lender does not require taxes and
insurance to be paid in escrow, where the money is held until the
payment is due).
Back To Top
Fixed-Rate
Mortgage Loans
Fixed-rate mortgages are called
fixed-rate because the amount of interest you pay stays the same
no matter what the interest rate is for other kinds of debt. This
keeps your mortgage payment from changing every time the prime
rate changes.
A 30-year mortgage will have
lower payments than a 15-year mortgage, but you’ll also pay a lot
more in interest (just like with credit cards, the longer you take
to pay off the balance of the loan, the more interest you end up
paying). You also build equity in your home a lot faster if you
have a 15-year mortgage because so much of your payment goes to
interest in the beginning when you have a 30-year loan.
Back To Top
Adjustable
Interest Rate Mortgage Loans
If you’re not planning to live in
your house for a long time, an adjustable rate mortgage might make
sense. These types of loans start with a fixed-rate period and
often have lower interest rates than fixed rate mortgages during
that time, which can range from a month to several years. After
that time the rate changes annually (or more or less frequently,
depending on the loan). There are caps that prevent your interest
rate from rising too much at one time or over the life of the
loan. Sometimes these loans can be converted to fixed-rate loans
for a fee.
Choosing which mortgage is right
for you can be tricky, but it will depend on how much you can pay
each month, how long you plan to live in the house and what the
current interest rates are.
Back To Top
FHA Mortgage
Loans
A popular option for first-time
homebuyers and those with less-than-perfect credit is the FHA
mortgage loan. These loans are fully insured by FHA (the Federal
Housing Authority) and require a three percent down payment, which
can be a gift to the borrower from a family member.
FHA mortgage loans offer more
flexibility than other loans in that they consider different
sources of credit besides just credit cards and will give mortgage
loans to people who have filed for bankruptcy, so long as the
bankruptcy has been discharged two or more years.
Mortgage loan rates for FHA loans
are competitive with other lenders and are a great choice for
someone who needs a bankruptcy mortgage loan. Other lenders may be
willing to give you a post-bankruptcy mortgage loan, but you
likely will be hit with higher interest rates than other buyers.
Back To Top
Subprime Mortgage
Loans
You may not hear the term
subprime mortgage loan when you are looking for a loan, but if you
have bad credit, this is the type of loan you will be dealing
with. If your credit score is below 620 (which it will be if you
are often late paying credit card bills) you will fall into the
subprime mortgage territory.
These loans can vary widely,
depending on the risk that the lender thinks people with bad
credit are. It’s important to shop around for the best mortgage
loan rate you can find if you are looking for a subprime mortgage.
What subprime mortgage loans have
in common across the board is that they will have higher interest
rates than other mortgage loans. They often involve a penalty for
refinancing or selling the house early, or have a balloon payment
built into the loan so that you either have to pay off the loan,
refinance or sell the house after some years have passed.
Back To Top
Jumbo mortgage
loans
Most loans are considered
“conforming loans” because they conform to the standard limits set
by the public corporations that buy loans across the country
(known as Fannie Mae and Freddy Mac).
Jumbo mortgage loans are
“nonconforming” because they allow you to borrow more than this
standard limit (currently around $360,000 for a single-family
home). You can buy a bigger house with a jumbo loan, but jumbo
loans also have higher interest rates because of the increased
risk in lending so much money.
Back To Top
Interest only
mortgage loan
Another loan type that has been
combined with a jumbo loan in the past is the interest only
mortgage loan, which is not really a mortgage in itself but a way
of paying your mortgage such that you only pay interest on it for
a certain amount of time. If you have a large loan it makes sense
to take the extra money you would have been paying toward the
principal and invest it. For smaller loan amounts, the difference
between a payment with principal and without is usually small and
you still have to pay off the full mortgage eventually. If you
keep the house for the full term of the loan you’ll end up paying
more in interest than you would have with a standard mortgage
loan, but it can be a good choice for a short-term home.
Back To Top
No Money Down
Mortgage Loan
Normally when you want to buy a
house you put some money down and the finance the rest through a
mortgage loan application. But there are no money down mortgage
loans that don’t require you to pay anything up front, often not
even closing costs.
Some of the more popular of
these, such at the Fannie Mae loan, the 103 percent loan and the
107 percent loan, require good credit scores (Fannie Mae requires
a 680 or higher score, for instance). As the names imply, these
loans often allow you to finance more than the value of the house.
The extra money can be used to pay closing costs, consolidate
debts, make improvements on the house, or anything else you want.
Back To Top
80/20 Mortgage
Loans
If your credit isn’t perfect you
may still be able to buy a house with a special kind of no money
down mortgage loan known as an 80 20 mortgage loan. With an 80 20
mortgage loan you take out two mortgages, one for 80 percent of
the purchase price and another for 20 percent. The 20 percent loan
usually has a higher interest rate. Using two different mortgage
loans allows you to get around paying private mortgage insurance,
which is usually required when the full price of the house is
mortgaged.
These mortgage loans may be some
combination of fixed-rate and adjustable-rate mortgages, and the
20 percent loan (also known as a piggyback loan) is often an
equity line of credit that has its interest rate tied to the prime
rate.
Back To Top
Stated income
mortgage loans
One of the biggest complaints
people have about mortgages is the mortgage loan application
process. There’s a ton of paperwork and it’s often very confusing.
There are now mortgage loans that you can apply for involving very
little paperwork; one of the most popular and least expensive of
these is known as a stated income mortgage loan.
A stated income mortgage loan
relies on your verifiable employment and assets. To qualify you
must have good credit, have worked in the same job for at least
two years and have five sources of credit (utilities, auto
insurance and other alternative sources are allowed). You must
also be able to put down five percent as a down payment; gifts are
not allowed.
Back To Top
Reverse Mortgage
Loan
If you have paid off your home
and need supplemental income you may qualify for a reverse
mortgage loan. This type of loan takes equity out of your house
and builds debt back up; you are paid monthly and don’t have to
pay the loan back as long as you live in your house.
This is the reverse of a common
mortgage where you are getting rid of debt and adding equity. To
qualify for a reverse mortgage loan, you must be at least 62 years
old, own your home and have no outstanding debts on your home.
A reverse mortgage loan is a good
way to supplement your retirement income. It is considered a
no-recourse loan, so the value of the house is the only thing that
can be used to repay the loan. If the value of the home drops
below the amount that has been paid out in the reverse mortgage
loan, the lender takes the loss.
Back To Top
Refinance
Mortgages Loans
If you have owned your home for
several years and the interest rate on your mortgage loan is high,
you might want to shop around for a refinance mortgage loan. The
advantage of refinancing your mortgage is to lower your interest
rate, which may lower your monthly payment and will lower the
amount you are paying in interest over the course of your loan.
There is no easy rule of thumb on
when the right time to go for a home refinance is. But if you have
shopped around and gotten an idea of what the closing costs will
be on the new mortgage loan, compare that amount to the amount you
expect to save with a refinanced mortgage. This will give you a
good idea if the refinance is worth it to you.
There are many different types of
refinance mortgage loans. Some simply involve paperwork (and a new
credit report filing) that changes your interest rate and payment,
but the more popular options these days allow you to refinance for
more money than is left on your mortgage loan, which gives you
extra money to pay off other debts or complete home improvement
projects around the house.
Back To Top
Bad Credit Loans
If bad credit problems plague you
after you purchase your home, you may be able to refinance or get
a second mortgage that includes debt consolidation and lowering
payments on other debts. Such bad credit loan mortgages (also
known as debt consolidation mortgages) can help you consolidate
other bills while lowering payments and allowing you to finance
your home, pay down your debts and have a little extra cash for
home improvements or other needs each month.
Back To Top
2nd Mortgage
Loans
There are a variety of second
mortgage loans available these days, most of which are designed to
help you use the equity in your home to get cash to pay other
debts. The most common kind of second mortgage loan used as a debt
consolidation loan is known as a home equity line of credit. A
second mortgage and home equity loan may be a short-term or
long-term loan, depending on the amount of money borrowed (the
more money you borrow, the longer you will likely want to pay it
off).
Second mortgage loans often come
with lender fees known as points. The points are a percentage of
the value of the loan and vary from lender to lender, so it pays
to shop around and see where you can get the best deal.
Fannie Mae
Homepath
Freddie Mac
-- Everything you need to know about housing, buying and owning a
home and finding a mortgage.
Federal Housing
Administration – All the basics on FHA loans, what it takes to
qualify and how to apply online.
Department of Housing and Urban Development -- HUD offers
information about buying, selling, owning and renting homes, and
includes information on HUD homes you can buy.
Federal Reserve -- Basic information on how to find the best
mortgage for you.
Back To Top
Thinking of
buying a home?
Buying a home is a big step, and
you need to spend some time thinking about why you want to buy a
house instead of rent. While buying a house can be a good
investment, you shouldn’t buy a house that you will live in just
for its investment potential.
Positives of home ownership
include paying into something that is yours monthly rather than
paying a landlord, and a portion of the interest and taxes you pay
on your home are tax deductible (this is especially valuable in
the first years of home ownership). Equity builds in a home over
time, which can be helpful if you need or want to take out a
second mortgage as a home improvement loan or for other purposes.
Back To Top
How much home can you afford?
The process of buying a home and
getting a mortgage will go a lot more smoothly for everyone if you
have some idea of how much house you can afford before you start
looking. There are two calculations that will give you a general
idea of how much you can spend.
Some mortgage loans
allow no more than 28 percent of your monthly household income
should go to housing (that’s paying the mortgage, taxes,
insurance, etc.) and no more than 36 percent of your income should
go to all debt. To figure out how much that limit is for you, add
up your annual income and multiply by either .28 or .36, then
divide by 12 to see how much you have to spend each month.
Then see if you can get an
estimate of home much your taxes and insurance will be and you
will know about how much mortgage payment you can
afford each month.
Back To Top |
