Types of Home Loans
Mortgage Loan Definition
A mortgage loan is a long-term loan for which the house and land you are buying are used as collateral. If you aren’t able to meet the terms of your mortgage, the bank or lending agency can take your house. It’s important when you are shopping for a loan to make sure that you balance the kind of house you want against the mortgage payment you can afford.
The main difference between first-time loans for houses is the amount of interest charged and how long the loan lasts. Most mortgages have 15 or 30-year terms, and the payment will include money for the principal, interest, taxes, and insurance (unless your lender does not require taxes and insurance to be paid in escrow, where the money is held until the payment is due).
Fixed-rate mortgages are called fixed-rate because the amount of interest you pay stays the same no matter what the interest rate is for other kinds of debt. This keeps your mortgage payment from changing every time the prime rate changes.
A 30-year mortgage will have lower payments than a 15-year mortgage, but you’ll also pay a lot more in interest (just like with credit cards, the longer you take to pay off the balance of the loan, the more interest you end up paying). You also build equity in your home a lot faster if you have a 15-year mortgage because so much of your payment goes to interest in the beginning when you have a 30-year loan.
If you’re not planning to live in your house for a long time, an adjustable rate mortgage might make sense. These types of loans start with a fixed-rate period and often have lower interest rates than fixed rate mortgages during that time, which can range from a month to several years. After that time the rate changes annually (or more or less frequently, depending on the loan). There are caps that prevent your interest rate from rising too much at one time or over the life of the loan. Sometimes these loans can be converted to fixed-rate loans for a fee.
Choosing which mortgage is right for you can be tricky, but it will depend on how much you can pay each month, how long you plan to live in the house and what the current interest rates are.
A popular option for first-time homebuyers and those with less-than-perfect credit is the FHA mortgage loan. These loans are fully insured by FHA (the Federal Housing Authority) and require a three percent down payment, which can be a gift to the borrower from a family member.
FHA mortgage loans offer more flexibility than other loans in that they consider different sources of credit besides just credit cards and will give mortgage loans to people who have filed for bankruptcy, so long as the bankruptcy has been discharged two or more years.
Mortgage loan rates for FHA loans are competitive with other lenders and are a great choice for someone who needs a bankruptcy mortgage loan. Other lenders may be willing to give you a post-bankruptcy mortgage loan, but you likely will be hit with higher interest rates than other buyers.
Most loans are considered “conforming loans” because they conform to the standard limits set by the public corporations that buy loans across the country (known as Fannie Mae and Freddy Mac).
Jumbo mortgage loans are “nonconforming” because they allow you to borrow more than this standard limit (currently $417,000 for a single-family home). You can buy a bigger house with a jumbo loan, but jumbo loans also have higher interest rates because of the increased risk in lending so much money.
If you have owned your home for several years and the interest rate on your mortgage loan is high, you might want to shop around for a refinance mortgage loan. The advantage of refinancing your mortgage is to lower your interest rate, which may lower your monthly payment and will lower the amount you are paying in interest over the course of your loan.
There is no easy rule of thumb on when the right time to go for a home refinance is. But if you have shopped around and gotten an idea of what the closing costs will be on the new mortgage loan, compare that amount to the amount you expect to save with a refinanced mortgage. This will give you a good idea if the refinance is worth it to you.
There are many different types of refinance mortgage loans. Some simply involve paperwork (and a new credit report filing) that changes your interest rate and payment, but the more popular options these days allow you to refinance for more money than is left on your mortgage loan, which gives you extra money to pay off other debts or complete home improvement projects around the house.
There are a variety of second mortgage loans available these days, most of which are designed to help you use the equity in your home to get cash to pay other debts. The most common kind of second mortgage loan used as a debt consolidation loan is known as a home equity line of credit. A second mortgage and home equity loan may be a short-term or long-term loan, depending on the amount of money borrowed (the more money you borrow, the longer you will likely want to pay it off).
Second mortgage loans often come with lender fees known as points. The points are a percentage of the value of the loan and vary from lender to lender, so it pays to shop around and see where you can get the best deal.
Fannie Mae – Home path
Freddie Mac – Everything you need to know about housing, buying and owning a home, and finding a mortgage.
Federal Housing Administration – Contains all the basics on FHA loans, what it takes to qualify and how to apply online.
FHA Loan Limits – Determine how much you can get from a FHA loan based on your city, county, state, and the type of home you are looking to purchase.
Department of Housing and Urban Development – HUD offers information about buying, selling, owning, and renting homes, and includes information on HUD homes you can buy.
Federal Reserve – Basic information on how to find the best mortgage for you.