Types of Mortgage Loans

What is a Mortgage?

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.

First Time Home Loans

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).

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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