LOAN BASICS AND TYPES
Jeff Laeng
MORTGAGE BASICS


What is a Mortgage?
Even the wisest savers are generally not able to pay the full price of a house out of pocket, and so must get a mortgage loan to secure the property. A mortgage loan is a common way to buy property without paying the full value of the home or land upfront. Most mortgage loans are an agreement that the buyer will pay the seller the full price of the property, plus interest, in regular payments over a set time period.

A mortgage note is a written promise to repay a certain amount of money, with interest, within a certain period of time. It shows in detail what the borrower is obligated to pay back. A mortgage note is secured by a mortgage, a document showing transfer of ownership of real estate.

The type of loan being used is shown on the mortgage note. A few common types are fixed rate mortgage (FRM), adjustable rate mortgage (ARM), balloon payment mortgage and interest-only loan.

There are two basic categories of mortgages: the conventional fixed-rate and the adjustable-rate mortgage (ARM). Within these categories, there are many variations. However, in nearly all mortgages, two factors are usually at odds: how predictable the payments are and how low, or affordable they are, at least initially.  

Borrowers choose fixed-rate loans because the mortgage payments are steady and predictable, allowing for easier household budgeting and planning. But in so doing, they give up a lower initial mortgage payment.  

Borrowers choose adjustable-rate mortgages because the mortgage payments are initially lower. A lower initial payment makes the home more affordable at first, but the borrower must also be willing to accept the risk of — and be confident in their ability to afford — an increased mortgage payment, sometimes significantly higher. In some cases, there's even the possibility of an increasing loan balance or negative amortization.  

To recap, getting a loan with adjustable payments results in lower payments at first but exposes you to some risk of high payments later. On the other hand, locking in steady predictable payments, with a fixed-rate loan, gives you a higher initial payment than the ARM, but you know exactly what you owe in principal and interest at any given time.

LOAN TYPES   

USDA-Rural Housing- loans-Designed for less populated area and is income restricted. Very good loan for rural areas and first time home buyers, but not just limited to first time buyers. 100% financing is available with this loan.

Conventional Loans- Loans available for people with as little as 3% down. The most common loan for those individuals with strong credit scores and money to put down on their new home

FHA Loans-Federal Housing Administration- Minimum down payment is 3.5%. Very common loan for those with a low down payment as well as for those with less strong credit scores that one might need for conventional financing.

VA-Veterans Administration- This loan type is a very popular loan for Veterans of the military. 100% financing is available and no mortgage insurance is required. For clients who want to utilize their VA eligibility.

Reverse Mortgages- Designed for those individuals over 62 years of age and have substantial equity in their primary residence. This loan allows an individual to eliminate a monthly mortgage payment and possibly pull money out from the equity of their home.


Return to the Learning Center