Home Mortgage Introduction
Home loan mortgage products provide a bevy of lending opportunities, aimed at meeting nearly every need. From conventional mortgage loans to second mortgages, understanding the features and benefits, along with the finance process is vital to obtaining the best rates, terms and conditions.
What is a Mortgage?
A mortgage is a loan that is tied to a property or home. The loan is paid in installments (payments) for a certain set amount of time. When a borrower closes on a mortgage loan, the borrower is promising the lender that he will pay back the loan. If, for whatever reason, the loan is not repaid, the property goes into foreclosure and can be repossessed by the lender.
For most people, obtaining a mortgage is the biggest and most important financial decision and obligation they will make.
Home buyers have access to several types of mortgage loans: fixed-rate, adjustable-rate, balloon/reset mortgages, reverse mortgages and VA/FHA mortgage loans.
A fixed-rate mortgage loan means that the borrower locks in a specific rate and pays the same amount each month for the life of the loan. Fixed-rate loans are popular because they offer stability; the borrower is protected against inflation, the loan is low risk and the fixed rate allows the homeowner to make financial plans for the future.
Variations of the fixed-rate mortgage product exist. These products are interest only and biweekly mortgages. The primary difference between a traditional fixed product and the interest only and biweekly mortgage is how the loan is paid.
An interest only product is divided into two payment periods. During the first period, borrowers pay only the interest and no principal toward the loan, making loan payments considerably lower. Borrowers pay the principal towards the loan during the second period.
Biweekly mortgages allow the borrower to pay off the loan quicker by making payments every two weeks instead of monthly.
With an adjustable-rate mortgage (ARM), the borrower’s payment fluctuates throughout the life of the loan based on the published index rate. Some borrowers are attracted to adjustable-rate mortgages because they typically start with a lower rate and lower monthly payment. During the initial period of the loan (anywhere from six months to 10 years), the rate does not change, however after that period, the rate will change based on the index and the margin.
All ARMS also have built in caps, floors and ceilings. The cap is set at how much the interest rate can fluctuate during each adjustment period. The floor is set at how low the rate can go throughout the life of the loan, whereas the ceiling is set at how high the rate can reach.
A variation on the ARM product is the hybrid ARM. The hybrid ARM is a combination of a fixed-rate and adjustable-rate product. Hybrids rates are fixed for a certain number of determined years then become an adjustable product for the remaining life of the loan. Hybrids are typically offered in terms such as 10/1, 7/1, 5/1, and 3/1. The initial number, “10” or “7” are the fixed years, with the next number “1” being adjustable.
Balloon and Reset Mortgage
Balloon/reset mortgage payments are based on the 30 year amortization schedule, but the borrower pays the entire amount at the end of the five or seven year term. Borrowers can reset their mortgage at that time at the current rate for the remainder of the amortization period.
The reset option is only available to borrowers who currently reside or own the home, paid the mortgage on-time for at least one year before the balloon maturity date and have no liens against the property.
One of the newer products, reverse mortgages are designed for elderly homeowners (age 62 or older) who want to benefit from the equity they’ve built into their home. The lender pays the borrower, typically in one lump sum, and the money does not have to be repaid until the home is sold or the homeowner dies.
Second Mortgage - Home Equity Loan
Homeowners who have built equity in their homes may be eligible for a second mortgage or home equity loan. A second mortgage allows the homeowner to access a loan that is based on the borrowers current mortgage balance compared to his or her home’s value. A home equity loan has set terms and payments, much like a traditional mortgage product.
VA and FHA Mortgage
Both VA (guaranteed by the US Department of Veteran Affairs) and FHA (Federal Housing Administration) mortgage loans offer liberal qualification requirements, lower closing costs and sometimes negotiable interest rates. Parties interested in obtaining either loan must provide proof of eligibility through either the VA or tax and income statements.
Before pursuing a mortgage product, prospective borrowers should consider his or her financial and credit situation. Since loan product rates are based on the borrower’s credit score, the borrower should obtain a copy of his or her credit report first.
The credit report generates a specific credit score based on the borrower’s assets, debts, income and investments. The higher the score, the more likely the borrower will be accepted for a mortgage loan at a lower rate. Negative reports such as bankruptcy and foreclosure have an extremely negative impact on the credit score and often haunt the borrower’s credit report for up to 10 years before being removed.
Borrowers should shop lenders based on rates, terms and products. Most financial institutions offer similar mortgage products, but at different rates and with varying conditions. For example, some financial institutions waive closing costs or offer a lower loan rate to customers who have other products at the financial institutions. To start get a Home Mortgage Quote.
Consumer Loans Freddie Mac
Consumer Credit Reports Federal Trade Commission
Federal Housing Administration