What is a mortgage loan?
A mortgage can simply be understood as a debt instrument that is usually secured by a particular real estate property. The borrower has a legal obligation to settle it with a predetermined set of payments. The loans are used by businesses and individuals to make real estate purchases without having to pay the entire value of a property upfront. The borrower then repays the principal amount and the interest over a specified number of years until he/she eventually owns the house. If for whatever reason the borrower stops paying the loan, the lending institution (bank or Mortgage Company) can foreclose. Thus, mortgage loans can also be referred to as claims on property or liens against the property.
What Types of Mortgages are there?
There are many different types of mortgage loans. Each type of mortgage loan has its advantages and disadvantages. Below is a rundown of some of the most common types of mortgages.
Fixed Rate Mortgage Loan
These kinds of mortgages have constant interest rates throughout the repayment period. In other words, the interest rates do not change when market conditions change. Its advantage is that the borrower does not suffer in case the market interest rates go up during the repayment period. The downside of this is that the borrower cannot benefit from lower repayment cost if the market interest rates go down during the repayment period.
Adjustable Rate Mortgage Loan
As the name suggests, interest rates on adjustable rate mortgage loans do change when mortgage market interest rates change during the repayment period. In other words, the cost of the mortgage could go up if the market interest rates go up. The advantage of the adjustable rate mortgage, on the other hand, is that the borrower can benefit from lower costs if the market interest rates fall during the repayment period.
Government Insured Mortgage Loan
Government-Insured mortgages are mortgages that are guaranteed or insured by the federal government. That means that the government ensures the borrower against the losses that might occur in the event of default. Some examples of these mortgages include the Federal Housing Administration (FHA) Loans and the Department of Veterans Affairs (VA) Loans. The disadvantage of government-insured mortgage is that the borrower has to pay for mortgage insurance, which may push the overall cost of the mortgage up.
Conventional Mortgage Loan
Conventional mortgage loans are the opposite of the government-insured loans. They are not insured or guaranteed by the federal government. Thus, although the cost of the loans can be lower, the lenders may be exposed to the risk of losing their investment in the event of a default. If the borrowers pay at least 20% down on a conventional loan they do not need to pay for mortgage insurance. If they choose to put less than 20% down, mortgage insurance is required.
Conforming Mortgage Loan and Jumbo Loans
Conforming mortgages are those that meet the underwriting guidelines of Freddie Mac and Fannie Mae concerning maximum loan amounts. Freddie Mac and Fannie Mae are corporations that buy mortgage-backed securities from lenders and sell them to investors in the Wall Street. Conforming loans are those that fall within limits sets out by these organizations. On the other hand, Jumbo loans are those mortgages that exceed the conforming loan limits.
The Takeaway
Overall, it is apparent that mortgages are loans advanced by banks or mortgage companies with the aim of helping businesses or individuals to acquire property without having to pay for the total value of the property upfront. The borrower has to pay the specified amount gradually until he/she eventually owns the property. It is also clear that there are several types of loans, and it’s important for you to understand them properly and ensure that you do your due diligence as you determine the most appropriate option for you.
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