What Are The Different Types Of Mortgages?

5 Different Mortgage Types
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Mortgages may seem daunting to the uninitiated, but in reality, they’re pretty straightforward. The basic premise of a mortgage is taking out a loan to purchase a home and within this premise, there are many paths to take to home ownership. Today, we’ll look at these different paths as we’ll cover the different types of mortgages that are out there to choose from. It’s also worth advising to use a trusted mortgage broker when looking for your home loan, as there are many different loan types available and it can be daunting trying to deal with all the banks and lenders.

Jumbo Mortgage

As the name implies, jumbo mortgages are high-ticket item mortgages geared toward expensive properties. The loan term APR rates can either be fixed or adjustable and have special terms to qualify for the mortgage. Borrowers must have a credit score of 700 or higher and are also required to have at least 10% down payment on the property.

VA Mortgage

VA Mortgages are backed by the Department of Veterans Affairs and this kind of mortgage is perfect for veterans of the armed forces. These mortgages offer veterans special low-interest rates and no down payment required to establish home ownership. Veterans just out of the service and looking to buy a home should look into these kind of mortgages as they can save quite a bit of money over the long term.

Interest-Only Mortgage

Interest-only mortgages are very unique as the borrower only pays on the interest of the note with their monthly payments. It’s up to the borrower to make payments on the principal of the note separately. This kind of mortgage is perfect for those not planning to spend a lot of time in the property.

USDA Mortgage

USDA Mortgages are mortgages backed by the United States Department of Agriculture and were originally geared towards farms and other rural properties. No down payments are required on most USDA mortgages and you can apply for improvements to the property over time with this mortgage.

Adjustable-Rate Mortgage

Adjustable rate mortgages or ARM’s as they’re usually called are a special kind of mortgage. The usual process in an ARM is to have an introductory APR upon the start of the note. This introductory low APR rate is locked in for a set amount of time. This period can last anywhere from one to ten years depending on the lender. Once this introductory period ends, the rate is adjusted according to the Prime Rate. If the Prime Rate rises, then your APR will rise as well and vice versa if the Prime Rate drops. This kind of a mortgage can be a bit of a gamble as you can end up with some nice interest rates if the Prime Rate goes through a down period. Conversely, you could also end up with a horrible loan rate for a period as well. If necessary, read further on ARM vs a fixed-rate loans.

FHA Mortgage

FHA mortgages or Federal Housing Administration mortgages are geared for lower-income borrowers. These loans have special provisos that lower-income borrowers can use to qualify for an FHA loan. These provisos include borrowers with credit scores as low as 500 and borrowers can be allowed to have a very low down payment, in some cases below 5%. The downside with such a low barrier of entry is the fact that you’ll be paying PMI on the monthly payments until you establish 20% equity in the home. This kind of mortgage can be a lifechanger for those with low credit scores and not much money to establish a down payment.

15-Year Fixed-Rate Mortgage

The 15-year fixed-rate mortgage offers a lower APR rate in comparison to other popular kinds of mortgage. The only sticking point of this kind of mortgage is the higher monthly payments affixed to a loan like this. The higher payments make sense when you consider the normal range of a 30-year loan monthly payment. You’re in essence, condensing a 30-year note into half the time with a 15-year note, so naturally the payments will reflect that. This particular kind of mortgage is the go-to when you’re refinancing your original mortgage. This kind of mortgage would be ideal for those who have the income to support the higher monthly payments as you end up paying much less interest over those 15 years versus a standard 30-year note.

30-Year Fixed Rate Mortgage

We’ve saved the most popular option for last, the venerable 30-year fixed-rate mortgage. This kind of mortgage is the most popular for a good reason and that’s due to the length of time allotted and the low cost of the monthly payments. This kind of mortgage is the lowest-entry point for most of us out there. The usual route is to have 20% down payment to get out of PMI (Private Mortgage Insurance) status and enjoy the predicability of having a low monthly payment for a long period of time. The APR on the note will not change with the Prime Rate as it’s a fixed-rate mortgage.

 

Finance Australia: What Is a Mortgage Broker?

There are many home buyers in Australia who are looking to get into home ownership for the first time. These home buyers may not be familiar with certain terminology or they may not be aware of the options they have in purchasing a home. The most pertinent barrier to home ownership is funding, how will these home buyers get the funding they need to make the purchase? Sure, there are the usual suspects to investigate such as banks, credit unions, and other financial institutions. But, what about other options that may not be readily available to the public? This is where a mortgage broker comes into play.

Mortgages – A Bustling Business

Mortgage Brokerages are firms that employ a team of mortgage brokers who specialize in getting mortgages for their clients. Visualize a stock broker from movies like “Boiler Room”, constantly making calls and trying to get the best stocks for their clients. A mortgage broker operates much the same way without the extreme intensity and pressure of stocks and bonds. The mortgage broker serves a high demand of matching clients with lending institutions to get the best deal for both parties.

Middleman

The broker is a mortgage expert with relationships cultivated over many years within the finance industry. These relationships stretch from Sydney to Perth throughout a network of banks and lenders that deal with a wide range of credit scores and clients. The broker can find lenders that are not accessible through the normal channels that the public has access to. These special lenders deal with other lending institutions or through mortgage brokerages exclusively.

2008 – Crisis of Confidence in the USA

2008 brought upon the housing market crisis in the United States with many mortgage brokerages facing scrutiny over their lending practices. So-called NINJA loans were utilized in these mortgages which ultimately caused a rise in defaults. The acronym NINJA stood for No Income and No Job in relation to loan qualifications. These types of practices brought a black eye upon the trade as scrutiny spread to other locations around the world. Because of this crisis, the brokerage houses re-doubled their efforts to establish a standard of ethical lending practices to avoid the same calamity happening in the future.

Typical Process of a Mortgage Broker

A client is looking to purchase a home in Sydney and is having problems garnering financing with their bank. The client does his due diligence and goes to a reputable mortgage broker in Sydney. The broker has the client fill out the proper paperwork with their financial information such as income, how long they’ve been at their job, bank statements, collateral, etc. If the client is looking for a mortgage with a co-signer, the co-signer’s requisite information is also gathered at the initial consultation. The real estate in question is also discussed and paperwork on the property gathered from either the client or the home seller which entails deeds, property tax information, and possibly home inspection paperwork done by an appraiser.

The Sydney mortgage broker then contacts a list of different lending institutions to get the best rate for the client based upon how much the mortgage will be worth and the client’s credit worthiness. Once a suitable match has been made, the broker will get the offer sheet from the lender and provide that to the client. The client can then either accept the terms or reject the terms and ask for a different lender. The broker can make their cut on the deal through a variety of ways. The broker can collect the brokerage fee (essentially, a finder’s fee) from the client once the client accepts the terms.

Another option is that the broker collects the fee from the lending institution upon final approval by the client. This last option may result in a tiny bump-up of the APR in the terms to the client to make up the difference to the lender. Yet another option to the broker is that the lending institution pays the broker a commission at final approval. This commission may be an addition to the brokerage fee that the broker collects from the client. This last scenario is most likely to happen with brokerage firms who send a large group of clients to a specific lender, establishing a solid relationship in the process.

Anatomy Of a Mortgage

There are certain signposts in the road of Life that most of us see as we continue down the path. These signposts fall under the usual suspects such as falling in love, getting married, having children and starting a family, etc. The signpost that most of us see whether we start a family or not is owning our own home. Some of us are lucky enough to have the capital available to purchase a home outright while a vast majority of us end up taking out a loan for the home. This loan for the home is called a mortgage and there are many kinds of loans that fall under this umbrella called a mortgage.

The word “mortgage”

Why the word “mortgage” and not the words “home loan”? Who’s Mort and why does he have a gauge? These are somewhat valid questions to ask and the reason for this particular word is steeped in history. The very word “mortgage” is taken from a term from Law French language in the Middle Ages in Britain. This term meant “death pledge” and is in reference to a death of a pledge (pledge conclusion) with two outcomes. The two outcomes to a death pledge were fulfillment of the original obligation or foreclosure of the property that was used as collateral.

Basic process of a mortgage

The process of obtaining a mortgage is the same no matter which kind of mortgage is being sought. The borrower seeks out a lender or a bank to obtain the funds needed for the purchase of the home. Dependent on which lending institution is used and the borrower’s financial situation, a down payment and/or a co-signer is required to obtain the mortgage. Most down payments on a house fall below the 20% equity of the home and this brings up PVI (Private Mortgage Insurance) which we’ll cover below. The terms of the mortgage are then agreed upon, these terms cover the length of the mortgage and the interest rate and monthly payments required during the term of the mortgage. Once the terms are agreed upon and the lender supplies the money to the Realtor or home owner for the home, the buyer “closes” on the home and they become the new owners of the home.

Mortgage terms and living with the home “on loan”

Your name may be on the house’s deed as the homeowner, but you don’t technically “own” the home as long as you have a mortgage on it. This is why your home is technically “on loan” as long as you’re making a mortgage payment. There is a signature from the lender at the bottom of the deed as a lien holder on the property. What this means is that the lender has a lien on your property and they can exercise this lien if certain terms of your mortgage are not met. These certain terms are in relation to keeping up with your monthly payments on the mortgage. If you fall behind in your payments, your mortgage will end up in arrears and this basically means that you’re in “catch-up” mode on your mortgage payment schedule. If you don’t bring the mortgage out of arrears and fall behind even more, the lender can foreclose on your property. That’s where the lien comes into play as it’s a legal document giving the lender legal rights to take your property due to non-payment.

Private Mortgage Insurance

As mentioned previously, PVI comes into play in most conventional mortgages when your equity (money paid towards the principal of the mortgage) is below 20% of the home’s value. In most cases, this insurance is an additional premium placed on your regular monthly insurance payment to your lender. This insurance is in place to protect the lender from high risk borrowers and the higher chance of having the loan defaulted. Once the equity in the mortgage reaches 20%, the PVI premiums are lifted from your monthly payments.

Conclusion

There are different types of mortgages available to fit to almost any budget or family situation. Having a sizable amount of money saved up for a down payment is the best course of action when you’re looking for a new mortgage on a property. Having this down payment puts you in good position to not have to pay PVI premiums and having a good size of equity built up from the start. This equity can provide emergency money down the road should you need it in the form of a home equity loan.