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.

Advantages of Using a Local Mortgage Loan Professional

Mortgage loan specialists with a solid grounding in the local market can tailor a mortgage package to the client’s best advantage. A comprehensive mortgage loan service should cater for a range of mortgage solutions yet still utilize the latest products to give the customer a mortgage environment that is competitively sound and pocket-friendly.

Early consultation with a professional mortgage loan manager makes a significant improvement to a home seeker’s resources. Having a detailed understanding of how recent market developments might influence sale and purchase can dramatically influence the buying price of a property. And no one is a better qualified mortgage loan adviser than a local loan expert with a reliable network of contacts.

Learning about the client’s personal history and goals is a priority for a mortgage loan professional. Not all mortgage packages are suitable for every applicant and knowing where a client’s financial strengths lie facilitates securing a more attractive loan.

Getting the Most out of the Money Available

Property lending products are designed on criteria carrying a variety of conditions and requirements. Every client could not possible fit into the criteria demanded by all mortgage loan applications. A professional mortgage loan specialist will apply expert negotiation skills to secure the best mortgage offer based on the client’s personal and financial capabilities.

A mortgage ‘offer in principle’ allows the customer to house-hunt in confidence, armed with a reliable set of financial boundaries. Knowing ‘where the ceiling is’ can make the difference between buying a dream house or settling for second best in a house that does not quite fill the bill, perhaps because the client was searching in too high or too low a price bracket and closed in haste.

Disappointment is hard to put up with when seeking a new family home. A good mortgage can mean getting a better house on the capital available but mortgage loan applications can be complicated, especially when relying upon standard offers from large financial institutions with a tendency to apply a ‘one size fits all’ policy, complete with unfavorable rates of interest and uncomfortable restrictions.

Asking the Right Questions

Financial blindness makes successful property search impossible. And without the services of a mortgage loan professional with local knowledge, such handicaps are inevitable. Asking the right questions at the right time can make a significant difference to a client’s borrowing power, such as:

  • Must the mortgage be structured on one income or can a second income be included in the application? For example, often an applicant will discard a partner’s pension believing the contribution to be too small to make a difference: a mortgage loan specialist will advise on the best application methods.
  • Is there a qualification for a VA loan; an FHA loan or a USDA loan?
  • Who is to pay the closing costs? Should these costs be considered when making an offer to the seller?
  • How will personal tax issues be affected by the size of the mortgage?
  • Will previous credit difficulties preclude securing a mortgage offer?

It is widely recognized that moving to a new home is one of the most stressful experiences, coming a close third to bereavement and divorce and often two of these life changing situation must be tackled at the same time, which is why it is vital to have the best possible advice and representation from a mortgage loan specialist with a broad understanding of the area.

Local knowledge can be the best possible tool to ensure a house move goes smoothly and economically. Having a wealth of local contacts helps to ease a client’s transition from one home to another and provides invaluable information on issues that relate to settling in a new and perhaps unfamiliar environment.

Troubleshooting

Mortgage applications should run on a relatively smooth timeline but as everyone knows, things do not always go to plan. This is where an expert mortgage loan manager can pre-handle potential problems and step in to deal with small procedural difficulties before they develop into major disasters.

Closing should always be attended by a properly licensed professional with the correct credentials to ensure documentation is in order, appropriate registration is carried out and financial transfers are conducted securely to the satisfaction of all parties.

Investment issues

Property purchased for inclusion in an investment portfolio is no less significant and in fact requires an equally high level of efficiency on transfer of ownership, not least due to the probability of buying and selling within a shorter time frame. Property market fluctuation might prompt an urgent sale and a mortgage loan facility that is inflexible can cause havoc on a short ‘turnaround’. Engaging the services of a mortgage loan specialist prior to purchase can smooth the path to a healthy investment program with maximum returns.

What You Need to Know About Mortgage Rates

Mortgage rates involve a number of factors and it is helpful to have a better understanding of how they work before choosing a mortgage.

Mortgage Rate vs. Annual Percentage Rate (APR)

To put it simply, the mortgage rate is the rate of interest charged on a mortgage. In other words, it is the cost involved in borrowing money for your loan. Think of it as the base cost. Mortgage rates differ from the annual percentage rate (APR). The mortgage rate describes the loan interest only, while APR includes any other costs or fees charged by the lender. The US Government requires mortgage lenders to provide their APR through the Truth in Lending Act. It allows consumers to have an apples to apples comparison of what a loan will cost them through different lenders. Keep in mind that lenders may calculate APR differently and APR also assumes you will hold the loan for its full amortization so it is still important to carefully compare and consider when selecting a loan.

How is the Mortgage Rate Determined?

First, the Federal Reserve determines a rate called the Federal Funds Rate. The Federal Reserve Bank requires that lenders maintain a percentage of deposits on hand each night. This is called the reserve requirement. Banks will borrow from each other to meet their reserve requirements. When the Federal Funds Rate is high, banks are able to borrow less money and the money they do lend is at a higher rate. When low, banks are more likely to borrow from each other to maintain their reserve requirement. It allows them to borrow more money and the interest rate goes down as well. The interest rates fluctuate with the Federal Funds Rate because it affects the amount of money that can be borrowed. Because money is scarcer, it is more expensive.

Also, when the Fed decreases their rates, we tend to spend more. Because loans are more inexpensive, people are more likely to use them to invest in capital. Also, because interest rates are low, savings accounts are reduced because they are not as valuable. This creates a surplus of money in the marketplace which lowers the value of the dollar and eventually becomes inflation. With inflation, mortgage rates increase so the Fed must carefully monitor their rate to ensure that our economy remains level.

Basically, the Federal Funds Rate is a large determinant of what the mortgage rate will be on a given day. And the Federal Funds Rate is largely determined based on the market including factors such as unemployment, growth, and inflation. However, there is no single mortgage rate at a given moment that every borrower will pay. This is because there are also other factors which determine an individual’s mortgage rate, and why they different people will have different rates.

Individual Determinants

There are several things that a lender can examine when determining your mortgage rate. One key factor is your credit score. A higher credit score makes you less risky to lend to and can significantly improve the rate you have to pay. You can also purchase “points” which are pre-payments on your loan interest. Speak with your lender to discuss points and how they might affect your loan. Finally, the amount of down payment can also change the interest rate. Typically, if you have more money up front, you have to borrow less, and you reduce the risk for the lender and your cost for the loan.

Mortgage rates are generally changing daily. Some lenders will stabilize their rates more than others, but it is always wise to compare rates between lenders at the same time and on the same mortgage type. It is also important to know that when a lender provides you with a rate, it is not a guarantee that tomorrow, the rate will still apply. Until you have chosen a mortgage and lock your rate in place with the lender, fluctuations can occur. As with any financial decision it is important to do your research and understand what you are getting into. It’s always wise to consult with your lender for personalized advice.