Mortgage Loans & Its Types

Mortgage loans are loans taken from banks, online brokers or independent mortgage brokers by pledging property owned for purchasing a residential or commercial property or to refinance a loan.

Mortgage loans are usually for a 15 or 30 year period. Mortgage payments are evened out according to the number of years, rate of interest and the type of mortgage. The property purchased is used as security or collateral to obtain the debt. If the borrower of the loan defaults on the mortgage payments the lender has the right to sell the property by employing the foreclosure process.

To be eligible for a particular loan the lender examines the employment and income generation of an individual or family to assess that monthly payment can be paid regularly by the borrower. The three important aspects that are taken into consideration to qualify for a loan are:

Credit Score
Monthly Income and
Down Payment
Credit scores indicate the risk of offering a loan to a borrower. Higher the score lower the risk. Good credit scores also ensure reasonable terms of loan and lower rate of interest. Monthly income is evaluated to ensure expenses are not more than income. The amount paid as down payment reduces the risk of the lender to cover the full expense of the loan incase of default in payments.

There are different types of mortgage loans available to suit the requirements of different borrowers. Some common and popular types of mortgage loans are:

Fixed Rate Mortgages

As the name suggests such loans carry a fixed rate over the period of the loan. They are among the most popular mortgage products which are not influenced by interest rate rise or falls. The interest rates are locked and payments remain same despite rise or fall in interest rates. Fixed rate mortgages are most popular when interest rates decline.

Adjustable Rate Mortgages

Adjustable rate mortgages provide a fixed rate of interest for a specific period and thereafter resorts to an adjustable rate of interest. ARM fluctuate according to market interest rate changes after the fixed rate period is complete.

Sub-prime Mortgages

This is a mortgage scheme directed towards those who have a less than satisfactory credit score. Credit score ranges between 300-900 and a score below 620 qualify for a sub-prime mortgage. Considering that the risk is higher in lending a loan to a sub-prime borrower the monthly payments and interest rates can be high. Such loans are a profitable venture for lenders on account of earnings from pre payment penalty, interest charges or foreclosures. Prepayment penalty is a charge levied on the lender on account of paying the loan before due by either selling the property or refinancing the loan.

Jumbo Mortgage

There are specified limits to loans sanctioned to: single family, two families, three families, or four families. If your loan requirements exceed this limit you need a jumbo mortgage which charges a higher rate of interest. They are also known as non conforming loans as they exceed the limit set by Fannie Mae and Freddie Mac.

Balloon Mortgage

This type of mortgage allows borrowers a lower rate and monthly payments for a particular period. Such a period lasts for three to ten years. After the completion of the term the borrower is required to pay the principal balance as a lump sum amount. If applicable and possible the balloon mortgage can also be converted to a fixed rate or adjustable rate loan.

Home Equity Line of Credit

Popularly known as HELOCs they are variable rate mortgages in line with the prime rate. You are allowed to take credit up to your credit limit which is the maximum amount one can borrow under any plan. The interest payments are tax deductible and one can also pay previous mortgage by taking a percentage of the appraised value of the home such that the loan amount covers your previous loan balance and your current fund requirements.

The Interest-Only Mortgage

This type of mortgage requires only interest payments to be paid for a specific period of time following which the terms of the loan change and a new mortgage amount is derived. This new mortgage will be paid with principal plus interest payments for the remaining number of years.

The Bare Bones of a Mortgage Loan

With the numerous mortgage options being offered by mortgage lenders today, newcomers to the arena may find the scenery just plain confusing. If you’re planning to get a mortgage loan, and you don’t know where to start, here is a list of the basics that you need to know about.

Mortgage Defined

A lot of people tend to use mortgage to mean a mortgage loan. A mortgage refers to the document that you, as a borrower, sign and entrust to a mortgage lender in return for a mortgage loan. If you default on your mortgage payments, the mortgage lender, through the document called mortgage, has the right to take possession of your property. The borrower, the one who applies for a mortgage loan, is referred to as the mortgagor since it is the borrower who hands the mortgage over to the mortgage lender.

Mortgage Loan

The basic premise of a mortgage loan is that it is a type of loan used to pay the difference between the purchase price and the cash available for a down payment. When mortgage lenders let you use their money, they will charge you a fee for it. The biggest fee is called the interest, which is expressed as an annual percentage of the loan. Usually, it is in the range of a low 5% and a high 12%. When you apply for a mortgage loan at one of these financial institutions, they will also charge you with an origination fee, which may include application fees, credit report fees and appraisal fees. The annual percentage rate (APR) consists of the base interest rate with points and other fees.

Mortgage Loan Rates

The mortgage loan comes in a fixed rate and adjustable rate. A fixed rate mortgage loan refers to a loan that features a fixed interest rate and fixed monthly payments for the entire life of a loan. Mortgage lenders typically offer 15- and 30-year fixed rate mortgage loans. An adjustable rate mortgage loan features lower initial rates, which may change as frequently as every six months. Borrowers who prefer going the least expensive way can opt for the 15-year mortgage loan. However, this type of loan is suitable for those who can afford the higher monthly mortgage payments. For people who plan on moving to another home in less than eight years, may find it more appropriate to settle for a 30-year mortgage loan, with its lower monthly mortgage payments.

Mortgage Loan and Down Payment

The down payment made on a house is usually in the range of five to 20 percent. The down payment precedes the mortgage loan, or the amount borrowed on the residual cost of the house. Thus a house that’s worth $450,000, you will require a down payment of $90,000 and a mortgage of $360,000.

Basic Mortgage Interest

Interest rates are prone to fluctuations, which make them highly unpredictable. There are two popular indices of short-term interest rates. The first one is the rate banks offer for six-month certificates of deposits (CDs). The second one is the interest on Treasury Bills, or T-bills. Mortgage lenders operate by charging around 2.5% over the publicly quoted interest rate. Compared to short-term rates, long-term rates are higher since they expose lenders to greater risk when lending money for a long time.