A mortgage is a loan from a credit union, bank or other lender that is secured by the home itself. This means that if the borrower fails to pay back the loan according to its terms, the lender can recoup the money lent by taking possession of the home.
Approximately 60% of all homeowners in the U.S. have a mortgage on their home. Unsurprisingly, with that many homeowners owing money on their home, there are many types of mortgages. First-time homebuyers normally get a “First Mortgage” as their first Mortgage, but there are different types of First Mortgages. We will explore the most common types of mortgages here.
Fixed Rate Mortgage: A fixed interest rate for full term of the loan. Fixed monthly payments are required and consist of the interest accrued that month plus a portion of the principal. Fixed rate mortgages are made in terms of years ranging from 30 years down to 10 or 15. Generally a down payment of 20% is required and if the borrower needs to borrow more to purchase the home, Private Mortgage Insurance (PMI) may be required.
Adjustable Rate Mortgage (ARM): As the name implies, an adjustable rate mortgage is a loan with an interest rate that is subject to change in the future. Often, the loan will have an initial term of years during which the interest rate is fixed (i.e. 5 years). After 5 years, the interest rate will be subject to change periodically (i.e. once per year). However, your lender cannot simply change the interest rate on a whim, it must be based upon published interest rates that are set according to market conditions. A common interest rate that may be used to determine your adjusted rate is the prime rate.
Interest Only Mortgage: Interest only loans allow the homeowner to pay only the interest for a set term at the beginning of the loan. For example, the loan may require interest only payments for the first five years. After the five year anniversary of the loan, monthly payments of principal and interest will be required. Interest only mortgages may be beneficial if you plan to own your home short time period and expect it to increase in value while you own it.
FHA Loans: Loans insured or guaranteed by the Federal Housing Administration. Designed to help first time home buyers, generally down payments are lower than non-FHA loans, credit requirements may be less stringent and fixed rates are available.
VA Loans: Loans insured or guaranteed by the U.S. Department of Veterans Affairs. For veterans of the U.S. Armed Forces, up to 100% financing is available with fixed rates and flexible qualification guidelines.
There are also Combo/Piggyback Loans, Balloon Mortgages, and Jumbo Mortgages. These are not as common and can require multiple loans to avoid Private Mortgage Insurance (PMI), interest only payments, commercial loans, or larger loans that would not be subject to the same low interest rate as a traditional mortgage.
We hope you found this mortgage information helpful! If you’re thinking about learning more about mortgages or applying for a mortgage, be sure to contact us!