What is a Mortgage?
[alert-announce]In most cases, it means a home loan and it can be used interchangeably with mortgage.[/alert-announce]
Mortgage is an agreement that allows a borrower to use property as collateral in order to secure a loan.
You sign an agreement when you borrow to buy a house stating that your lender has the right to take all drastic measures if you don’t make your required payments on the loan.
The bank can force you to move out of the property so as to sell the home and use the sales proceeds to pay off any debt you still owe on the property.
A mortgage is a document that makes your lender the right to foreclose on your home.
It is an agreement that makes your home loan possible.
Mortgage makes it possible for people to buy a home because real estate is expensive and most people don’t have enough cash in savings to buy a home.
Banks requires you to use the property you are buying as collateral thereby protecting themselves.
The pledge you made on your property as collateral is your “mortgage’’ and in your agreement, the bank gets permission to put a lien on your home if need be so they can foreclose it.
Types of Mortgages
There are various types of mortgages and you need to understand the terminology in order to pick the right loan for your situation.
Fixed Rate Mortgage:
This allows a borrower to know what all future monthly payments will be.
Your payment will not vary when you use a fixed rate mortgage because the interest rate is fixed.
You can calculate how long it will take to pay off all the principle and interest with a fixed rate.
You will pay the same monthly payment through the entire fixed rate mortgage term.
Fixed Rate Mortgage Types: there are two main types of fixed rate mortgages.
- 15 year Fixed Mortgages
- 30 year Fixed Mortgages
10-year or 20-year fixed rate mortgage exist but not commonly used.
Advantages of Fixed Rate Mortgage
- Your payments won’t change no matter what happens with interest rates.
- Fixed rate mortgages are helpful in the sense that it allows you can predict what your housing payments will be in the future.
Disadvantage of Fixed Rate Mortgage
- You have higher monthly payment than any other mortgage choices.
- Adjustable mortgage rate (ARM): this rate rises and fall as interest rates rise and fall.
They are risky and can be useful loans for getting into a home.
Adjustable rate mortgages:
Adjustable rate mortgages are unique in the sense that the interest rate on the mortgages adjust with interest rates in the marketplace.
Advantages of Adjustable Rate Mortgage
- The Bank is stuck loaning you money at a below-market rate.
- You are rewarded with a lower initial rate by the Bank because, you are taking a risk in the sense that their could be a rise in the interest rate in the future.
Disadvantage of Adjustable Rate Mortgage
- The payment can get so high that you have to default on the debt.
While you may benefit from the lower payment but your monthly payment can increase drastically once the rate rises on you.
How To Manage Adjustable Rate Mortgage
- The best way to manage the Adjustable Rate Mortgage risk is to have a loan with restrictions and “Caps”.
Caps are limits in how much an adjustable rate mortgage rate can adjust actually.
- Your loan may include a guaranteed number of years before the rates starts adjusting – for instance the first five years.
You might have caps on the dollar amount of your monthly payment or on the interest rate applied to your loan.
These restrictions can create some programs but removes some of the risk associated with adjustable rate mortgage.
How does the ARM work?
- Lifetime caps: this limit the extent at which your ARM mortgage rate can change over the lifespan of the loan.
If you have got a lifetime cap of 5%, The interest rate on your loan will not adjust upward more than 5%.
- Period cap: this limits how much your rate can change during a given period – one year period for instance.
If you have a period cap of 1% each year and the rates rises 3% that year, your ARM mortgage rate will only rise 1% because of the cap.
All caps are not the same
- The first adjustment may be up to 5%
- The subsequent one can be capped at 1%
Disadvantage of caps
- If rates gets so high that you hit the upper dollar limit in your payment, you may not be able to pay off all the interest you owe for a given month.
You get into negative amortization which means that your loan balance actually increases each month.
ARM flavors available
- 1 year ARM mortgage: the rate is fixed for seven years then adjusts annually up to any cap.
- 7/1 ARM Mortgage: the rate is fixed for seven years then adjusts annually up to the cap if any.
- 10/1 ARM Mortgage: this rate is fixed for 10 years then adjusts yearly ( up to cap if any).
- Second Mortgage: this is also known as Home Equity Lines of Credit (HELOCs).
Second Mortgage is a loan that uses your home as collateral and it let’s you borrow against the value of your home.
Several Forms of Second Mortgage
- Line of credit
- Lump sum
- Rate choices
Second Mortgage Advantage
- Interest Rate: it has lower interest Rate.
- Tax benefits
- Loan amount: you can borrow a large amount.
Second Mortgage Disadvantage
- Interest cost
- Risk of foreclosure
Uses of Second Mortgage
- Debt Consolidation
- Home improvement
- Avoiding Private Mortgage Insurance (PMI)
How To Get a Second Mortgage
- Shop around:
- An online lender
- A local Bank or credit union
- A mortgage broker
- Get Prepared
- Beware of dangerous loan features
- Pre-payment penalties
- Voluntary Insurance
- Balloon payment.
This type of mortgage provide income for homeowners who have significant Home equity.
Reverse Mortgages are only available to homeowners aged 62 or more and you really don’t have to repay these loans until you move out of your house.
As long as you meet the necessary requirement, Reverse mortgage provides money for anything u want.
Advantage of Reverse Mortgage
- Interest rate
- Periodic payment
- Line of credit
- Lump Sum
Cost of Reversal Mortgage
- Servicing Fees
- Insurance Premium
- Closing costs
- Ongoing expenses: continue to pay all the ongoing expenses related to your home.
- Sufficient equity
- First Mortgage
- Interest Only Loans: this allows you to pay only the interest cost on your loan monthly.
- Balloon Loans: this type of loan will require you to pay off the entire loan in large payment.
- Refinance Loans: this loan allows you to get a new mortgage in order to pay off the old Loan.
How To Get a Home Loan
- Documentation and Ratios: this is done to verify if you have enough income to repay any loan approved.
- Credit and Income: this is your primary factors that determine whether you get a loan or not.
- Debt to Income: here, lenders look at your existing debts to ensure you have sufficient income to pay off all your loan especially the new one you are applying for.
- Loan to Value Ratio: here, Lenders calculate this to show how much you are borrowing compared to how much the property is worth.
- Pre-approval: this is a preliminary process where lenders evaluate your credit information and your income.
Where To Borrow
- Banks and Credit Union
- Mortgage Brookers
- Online Lenders
Other Types Of Loans
- VA Loans
- FHA Loans
- Government Loans
- Jumbo Loans
List of Mortgage Companies
- Guild Mortgage
- Fairway Independent Mortgage
- New American Funding
- Prospect Mortgage
- HomeBridge Financial Services
- Academy Mortgage
- American Pacific Mortgage
- Homestreet Bank Mortgage
- France of America Mortgage
- PrimeLending Mortgage
- LoanDepot Mortgage
- Freedom Mortgage Corporation
- Caliber Home Loans
- Guarantee Rate Mortgage
- Stearns Lending Mortgage
- New Penn Financial Mortgage
- Mortgage Master
- RPM Mortgage
- Paramount Residential Mortgage
- Sierra Pacific Mortgage
- Supreme Lending
- Banc Home Loans
- FBC Mortgage
- Freemont Bank
- George Manson Mortgage
- Wintrust Mortgage
- Summit finding Mortgage
- Cherry Creck Mortgage
- Residential Mortgage Services
- Embrace Home Loans
- First Home Mortgage
- Bay Equity Home Loans
- American Financial Network
- Skyline Home Loans
- Opes Advisors Mortgage Services
- Gateway Mortgage Group
- Prosperity Home Mortgage
- SWBC Mortgage
- Scanty National Mortgage Company
- Pulte Mortgage
- NOVA Home Loans
- J. Bradley Mortgage
- The Freedom Savings Bank
- Mortgage Network
- On Q Financial Mortgage
- Envoy Mortgage
- First Choice Loans Services
- Citywide Home Loans