Mortgage Types Explained
Each borrower and home buyer is individual and has certain needs and desires. Because of this, there are so many varieties of mortgage options available tailored in such a way that they meet everyone’s needs.
The choice that involves what mortgage type you are going to get is a difficult but very important at the same time. Because of this, you need to know precisely your options so you make the right call when you finally set on a mortgage type.
The type of mortgage which is the most popular one out of them all is the fixed-rate mortgage. As the name implies, the interest rate is locked and will remain constant over the term duration. This fixed-rate mortgage lets borrowers make the exact same payment every month, giving each borrower peace of mind because they don’t have to worry about their loan installment going up.
But, the rate is only locked in for the settled term, not for the whole amortization period of your mortgage. As an example, if you settle on a 30 year mortgage with a term of 5 years, the interest rate given is available only for those 5 years. When the 5 year term has passed, you have to renegotiate a new rate at a new term, or change the mortgage altogether.
The advantage of predictability obviously comes with disadvantages. Fixed-rate mortgages are a bit more challenging to get approved and they usually come with higher closing costs. Regardless of these disadvantages, a fixed-rate mortgage is better for most buyers, especially for people who get their mortgage for the first time.
As opposed to the fixed-rate mortgages, the adjustable-rate mortgages come with a fluctuating interest rate. This type of loan usually starts with a low rate and adjusts over time according to the market, rate which will change during the term of the mortgage.
This kind of mortgages are set up like a regular loan based on the present interest rate at the beginning. At regular intervals, the market is reviewed and if it changes, the lander will adjust the mortgage repayment plan as he considers fit. The mortgage is changed by modifying the size of the payment, changing the length of the amortization period or a combination of these two.
These days, most people won’t go for a “pure” adjustable-rate mortgage and instead go for a “hybrid” adjustable-rate mortgage. These “hybrids” have an interest rate which is guaranteed to stay the same for a certain period of time.
There is a type of mortgage which is not insured by the government called a conventional – or sometimes conforming – mortgage. This type of mortgage has no guarantees to the lander if the borrower fails to pay the loan installments. Because of this, they are often considered risky for the landers. Being so risky means that the borrowers need to have a healthy financial history, a low debt-to-income ratio and a high credit score to be eligible for a conventional loan.
The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation guidelines show that if less than 20% is put towards a down payment then the lander must bring a private insurer for the loan. These private insurer, called a Private Mortgage insurance, has to be paid by the borrower, but if 20% of the property’s purchase value has been paid by the borrower then the payments for the private insurance will stop.
These types of mortgages which follow the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation guidelines are both with a fixed-rate or an adjustable-rate.
Because the conventional loans have a high requirements, not everyone is eligible for one of them. For those who don’t get approved there is a possibility to get a loan which is backed up by the government, such as a FHA loan. The Federal Housing Administration(FHA) loans are highly searched by people who don’t have a perfect credit score due to their interesting features and availability concerning their requirements.
These FHA mortgages can have a low down payment for those who don’t have the ability to acquire such a large sum of money, allowing buyers a down payment as small as 3.5%. The Federal Housing Administration doesn’t really issue the loans themselves, they just support the landers if the borrowers fail on their mortgage payments.
There are certain borrowers who choose an interest-only mortgage to try to pay as little as they can. When the monthly mortgage payments are made up entirely out of interest, they are considered to be “interest only”. These mortgages have a specific period, fared between 5 to 10 years. Because no principal is paid, the only way equity is being built for the home while having an interest-only mortgage is through appreciation.
These options should be temporary due to increase in the interest that will need to be paid and the home equity being lowered.
Home Equity Loans
This kind of loans allow homeowners to borrow extra money for the equity built so far for the home. They are generally used for those who need to cover a large expense, like a home renovation. The home equity loans give people the possibility to borrow up to 100.000$ which can be deducted completely when filing their tax returns.
There can be two types of home equity loans. A fixed rate one which fare between 5 and 15 years which has to be paid when the home is sold and a line of credit one.
The line of credit one, called a home equity line of credit (HELOC) allows homeowners to borrow money in a way of which credit cards work.