What Is A Mortgage?
When you decide to take that all-important step of homeownership, you will most likely need to take out a loan from a bank in order to pay for your new property. This loan, secured by real property, is what is known as a mortgage, and there are several different types tailored to fit different individual situations and needs. Mortgages can be used to both purchase and refinance property, and the latter types are known as second mortgages or refinances. With a mortgage in place, you are responsible (as with any other type of loan) to make monthly payments on the principle amount of the loan, as well as the compounding interest. (In most cases) Here are some of the most common types of mortgages, as well as some general information about each one. For more detailed information, you should speak with your financial advisor and your real estate agent (if applicable) since mortgage rates, types, and restrictions can vary by state.
Key Mortgage Terms To Know:
There are several different types of fees associated with a mortgage that fall under the lump umbrella term “closing costs”. Many lenders charge an origination and processing fee, and other fees may include, but are not limited to: attorney’s fees, filing fees, mortgage taxes, title search and title insurance. You may also be asked to pay estate taxes and/or establish escrow accounts for real estate taxes and homeowners insurance.
Annual Percentage Rate:
The APR, or Annual Percentage Rate, is the actual cost you are paying for your mortgage loan, and this cost is reflected as a yearly rate. It will generally be higher than the fees that are paid directly to your lender, and it is important to know that the interest rate paid on the any mortgage, as well as any mortgage insurance premiums need to be considered when calculating an APR, as these things may have an effect on the rate that you are given.
Types of Mortgages
Fixed Rate Mortgages:
With this type of mortgage loan, the interest rate remains relatively the same, which can be a good thing if you are able to lock in a low rate at the time of closing. The APR determines the annual rate increases or decreases of interest rate, and a low APR on a fixed-rate mortgage is considered by many to be the optimal loan situation.
Adjustable Rate Mortgages:
These are also known as “Variable” or “Floating” mortgages, since the interest rate on these types of loans is not fixed, and can fluctuate depending on several factors, including the current real estate market climate. An advantage of an adjustable rate mortgage is that it allows for the potential of time periods when the interest that you pay will be less, but there is also the disadvantage that you will sometimes be paying more.
With this type of loan, the borrower pays only the interest on the principle balance, leaving the principle unchanged, for a set period of time. Once the interest-only loan term has ended, the borrow has the option of converting to another interest-only mortgage, pay off the principle, or in some cases, convert the loan to a principal and interest payment loan, a process which is known as mortgage amortization. Interest-only mortgages are also sometimes known as Negative Amortization Loan.
Graduated Payment Mortgages:
These types of loans are geared towards lower income individuals who cannot afford large mortgage payments at the present time, but who are realistically expected to be able to do so in the future. A GPM is a form of negative amortization loan.
Balloon Payment Mortgages:
Balloon Payment Mortgages are short term mortgages that have some of the features of a fixed rate mortgage. Balloon mortgages provide a level of payment feature during the term of the loan, but, as opposed to some fixed rate mortgages, do not fully amortize over the original term. At the end of the loan term, there will still be a remaining principal loan balance which will generally be required to be paid in full. This can be accomplished through a refinance, or through a mortgage conversion feature offered by some companies.
First Time Home Buyers
There are many types of mortgage loan and other programs available to first time homebuyers. These vary by state, with some state offering more extensive options than others. In some states, including California, individuals who have previously owned property in another state and have not been homeowners (in CA) for a certain period of time may be able to qualify as first time homebuyers, and be eligible to take advantage of first time homebuyer programs. First time homebuyers, depending on their income and credit scores, may qualify for government programs that offer federal home purchasing assistance. Since these programs and their eligibility requirements do vary by state, it is important to ask your realtor about all of your individual options.
Your Biggest Investment: Property Ownership
For many, residential property ownership is the largest type of investment that they will ever make. Property earns equity, can appreciate in value, and can provide a source of cash flow via a refinance, home equity loan, or home equity line of credit. Make sure to research and discover all mortgage loan options available to you, and discuss them with your personal financial planner before making any final decisions.