Com-Mortgage will describe the Types of Mortgage, Mortgage-related terms and differences.
What is Mortgage?
A mortgage is a type of loan, bound by a collateral real estate property and the borrower is indebted to pay back the loan with an agreed set of payments. Mortgages help people to buy real estate without paying the whole value of the property up front. Over a period that usually spans many years, the borrower repays the loan amount with interest and ultimately owns the property clear of all debts.
A mortgage is secured by a legal process known as liens against the property. And in that case, if the borrower stops paying the mortgage, the alien enables the bank or the lender to take possession and sell the secured property to pay off the loan.
Importance of Mortgage:
Mortgage plays a significant role in the world financial market because it focuses on economic growth enhancement and improving living standards. Affordable and low-interest rate mortgage loans can be desirable and may serve as enzymes for the economic development in a short time.
Purchasing a home is a huge step in life, and a mortgage may be the most significant financial decision you are going to make. Finding a mortgage once seemed to be very straightforward and easy process but in today’s economic scenario the same has become extremely confusing.
Buying a home is everybody’s dream and exciting experience if that dream comes true, but it may prove to be one of the most challenging and puzzling if you are not aware of how mortgage process works. Most of the people feel overwhelmed because of the process they face and the staggering amount of paperwork they need to complete.
Knowing what to expect, especially if you’re a first-time home buyer, will undoubtedly aid your decision making about your home acquisition. For this sake, you need to know what a mortgage is.
Types of Mortgage Loan
In today’s world of digital and advanced banking, either you are planning to purchase a house, or giving a thought to finance an existing mortgage, the decision may be very confusing due to the availability of a large number of type of mortgage loans.
Owing to many types of mortgage loans and your expectations about interest rates, how long you need to keep the house, and what will be the status of other debts over the life of the mortgage and the present and future tax rates, the decision about mortgage becomes more difficult and more confusing. At this stage, you need to know about different types of mortgages, so that you will be able to make a rational decision.
Mortgages are divided into two main types: Fixed Rate Mortgage Loans and Adjustable Rate Mortgage Loans. Under these two main categories, we will see many divisions.
This type of mortgage offers a steady level of monthly payments of principal plus interest till maturity of the mortgage, the duration of loan ranges typically from 15 to 30 years. As it offers a fixed and stable monthly payment that does not change in entire mortgage tenure, the fixed rate mortgage loan is the most popular type. A 30-year loan as compared to 15-year loan has lower payments but a higher interest rate. To pay off a fixed rate loan earlier than the agreed time, you should check your agreement with the lender to make sure that no penalties are imposed at any time.
Adjustable Rate Mortgage (ARM):
These loans are true to their name and do precisely what they say. These are mortgages in which the interest rate is not fixed but is variable; it is based on floating interest rate and is adjusted according to a specified interest rate index. Questions like when the price varies, by how much it differs, and to which extent it affects the loan amount cannot be answered for sure because this depends upon the interest rate index of the lending company/bank. Standard interest rate index includes:
Treasury bill yields:
The profit on the one-year treasury bill (T-bill), adjusted for constant-maturity security, is widely used for adjustable rate mortgage. However, a word of caution here is that be careful here is that the contract rate for this type of mortgage is usually higher than the initial price that is advertised.
Balloon Mortgage Loan:
In this type of loan there are two scenarios, firstly it offers a series of fixed payments for a specific period (usually 5 to 7 years), followed by one significant amount, which is called a balloon payment, and this payment considerably reduces the remaining loan balance. In the second scenario, these loans often have interest-only payments. Means, in monthly instalments you only pay the interest, and entire principal amount remains due till the end of the loan term. A balloon mortgage enables you to minimise your monthly payments, but at the end, you have to refinance the loan.
Convertible Mortgage Loans: These are adjustable rate mortgage (ARM) loans that give you an opportunity to be converted to a fixed rate loan at or before a specified time. The conversion privilege allows you to start with a low variable rate and fix it in when interest fixed rates drop.
Renovation Loan: It provides double services to the borrower; first it funds the home purchase and secondly provides an additional amount to renovate it. The amount of renovation loan is based on the future value of the home after renovation. This type of mortgage also helps business-minded buyers who make higher mortgage payments to build equity faster.
Federal Housing Administration (FHA) Loans: FHA provides insurance services to a wide variety of mortgages lenders. The idea is that for a specified period of agreed time if the borrower fails to pay the mortgage instalments the federal housing administration covers the instalments. It facilitates the homebuyers who have little down payment, who are facing credit challenges with a limited or less likely credit history, and such borrowers may need the help of a family member or friend as a co-signer to qualify the loan. The main features of this loan are; it has low down payment requirements, Loan limits are based on geographic locations, offers more liberal mortgage qualifying procedures and also facilitates with gift funds for down payment or closing costs.
Veterans Aﬀairs (VA) Loans: It is for American citizens only where the Department of Veterans Aﬀairs (VA) promises mortgages provided by many lenders to certified veterans and active-duty military personnel and also to their spouses. It has a unique facility of very low or no down payment and a broad and appealing range of interest rates, terms, and costs. It offers flexible mortgage qualifying rules with use of gift funds for closing costs.
Understand the Mortgage relevant Terms: To be able to make a right decision in the selection of mortgage companies, first, you need to understand the underlying mortgage terms. Some of the most widely used terms and conditions are given below:-
Adjustable Rate Mortgage (ARM): Mortgage loans under which the interest rate is periodically adjusted, but changes during the life of the loan in line with movements in an index rate. Adjustable Rate Mortgage may also be referred to as AMLs (Flexible mortgage loans) or VRMs (variable-rate mortgages).
Assets: Anything of value that an individual possesses is called assets.
Annual Percentage Rate (APR): A scale to measure the cost of credit which is taken as a yearly rate plus interest as well as other charges. APR offers consumers a reasonable basis for comparing the value of loans, including mortgage plans as all lenders follow the same rules to ensure the accuracy of the annual percentage rate.
Amortization: The systematic and regular payment of a debt through instalments until the debt has been paid in full.
Appraisal: An evaluation report prepared by a qualified person to estimate the value of the property. An assessment may also be taken as a process through which property value is derived.
Bankruptcy: It’s a lawful relaxation from the payment of debts after surrendering all assets to a court-appointed trustee. All assets are distributed to lenders as the satisfaction of liabilities, with some negotiations and exemptions.
Cap: The limit placed on adjustments that can be made to the interest rate or payments such as the annual cap on an adjustable rate loan (ARM) or the cap on a rate over the life of the loan.
Amortization schedule: A table showing the mortgage payment (broken down by interest and principal paid), the loan balance, any tax and insurance fees made by the lender, and the balance of the tax/insurance escrow account.
Co-Borrower: A partner borrower who signs the mortgage agreement along with the primary borrower, and also shares title to the subject real estate and burden of the mortgage.
Collateral: Property promised as security for a debt is called collateral. For example, real estate that secures a mortgage. Collateral can be reclaimed by the lender if the loan is not repaid.
Creditor: A person to whom the debt is owed by another person who is the debtor or the person who lends the money.
Debt to Income Ratio: This ratio compares the amount of monthly income to the amount the borrower has to pay each month in-house payment plus other debts. The additional obligations may include but are not limited to credit cards, alimony, car payments, children support, and personal loans. This ratio is commonly used to see if the borrower has the worth to repay the loan.
Down Payment: The part of the payment made by the buyer in cash and does not finance with a mortgage.
Escrow Account: An account provided by the lending company to which the borrower pays monthly instalments for property taxes, insurance, and special assessments, and from which the lender disburses these sums as they become due.
Floating: The term used when a purchaser elects not to lock-in an interest rate at the time of application.
First Mortgage: A real estate loan that creates a primary lien against real property.
Interest: The amount paid by a borrower to a lender for the use of the lender’s money for a specific period.
ALien: A legal entitlement against a property that is required to be paid off when the property is sold. Alien is created when someone borrows money and uses the property as collateral for the loan.
Mortgage Insurance: Insurance written in connection with a mortgage loan that indemnifies the lender in the event of borrower default. In connection with conventional loan transactions, this insurance is commonly referred to as Private Mortgage Insurance.
Mortgagee / Mortgage Lender: A company, group, or individual that lends money on the security of pledged real estate; in other words the lender.
Mortgagor/ Mortgage Borrower: The owner of real estate who pledges his property as security for the repayment of a loan; in other words the borrower.
Prepayment Penalty: A penalty under a Note, Mortgage or Deed of Trust imposed when the loan is paid before its maturity date.
Balloon mortgage: A mortgage which can be paid in full after a period that is shorter than the term. In many cases, the balance is refinanced with the current or another lender. Balloon mortgages are similar to ARMs in that the borrower trades off a lower rate in the early years against the risk of a higher price later.
Mortgage Note: It’s a legitimate document that proves your indebtedness and also shows your formal commitment to pay back the mortgage loan with all terms and conditions that apply but are in your full knowledge. The mortgage note also enlightens the penalties if the monthly mortgage instalments are not paid in time.
Mortgage Rate: The interest rate paid by the borrower on the principal amount is called mortgage rate.
Mortgage Servicer: The mortgage company/bank that collects your mortgage loan payments is mortgage servicer.
Principal: The amount of money borrowed from the lender to buy your house but this amount does not include the interest that you are bound to pay for borrowing the money.
Foreclosure: A legal action initiated by the lender and which ends all your ownership rights to a home due to failure to pay a series of mortgage payments.
The terms explained above are the most commonly used mortgage terms, but in actual, there are a lot many terms which can’t be covered at the moment. However, these terms will help you understand when you go through the content regarding mortgage given on the internet.
Before Entering the Mortgage Process
The idea of buying a home seems very tempting and exciting, but at the same time, there are many things you need to look for before you enter the mortgage process. Before the banks or mortgage companies evaluate you for the worth, you should begin by assessing yourself that how much you can afford, depending on your spending habits/plan and comfort level.
Along with self-evaluation, you should also evaluate mortgage companies/banks because they may not have your best interests in mind. While determining mortgage companies and banks, you may take into consideration following few cautions:-
Decline “Easy Money.” Beware if companies claim that your credit problems won’t be an issue for sanctioning mortgage and also it won’t affect the interest rate. After this, if the offer seems worthy of getting information, get it in writing and prefer a second opinion on the matter.
Pay a Visit to the whole Market: Always try to touch as many mortgages as you can to find the best mortgage loan for you. A mortgage loan product or lending offer may seem appealing and appropriate until you make a comparison with a similar product of another mortgagee.
Ask About Prepayment Penalties: It’s a common practice of mortgage companies that they include prepayment penalty if the loan is paid off by you earlier than the agreed time. For this reason, you should ask in advance for such sanctions, and if it is in practice, you may ask for other products that do not have such penalties.
Say No to Incorrect Documents: If someone offers you to falsify your income information that may qualify you for a mortgage loan, immediately get rid of such person. Because forging your information or signing false documents may lead you behind bars.
Submit Complete Documents: Never sign documents with blank fields or incorrect dates. Do not trust anyone promising that the papers will be filled in later or someone with more expertise will fix the blanks then after you’ve signed.
Enquire About Additional Charges: Ensure that you know about all upfront and hidden charges that are included in your mortgage loan process. If something appears to be unknown or you may not know about that ask the company representative before signing the mortgage documents.
Ask About the Complete Package: Ask about complete mortgage loan package including written estimates, points and all types of charges. Compare the annual percentage rate (APR), as some of the costs heavily depend on the loan’s interest rate.
Avoid Scam Credit Counselors: Always prefer legitimate credit counsellors, they may charge you a little high, but they provide credible information and assistance to their clients. Look out for scam credit counsellors because they may drag you into trouble stretched over decades. Also, gather information regarding combining of credit card or other debts with a mortgage loan.
Mortgage Calculator 2018
Understanding different types and terms of the mortgage are not enough for better financial decisions. Instead of depending on the banks/mortgage companies or service providers, you need to focus on the numbers behind the mortgage.
Usually, people only focus on the monthly mortgage instalment, but there are other significant details also that need your attention. A few but essential features are required to calculate a mortgage, and when you have the requisite information, then you can do it all by yourself or through free online calculators and spreadsheets to get the numbers.
For mortgage calculation you need the following details:-
The total amount of loan or principal. This is the home purchase price, excluding any down payment, although other fees may be added to the loan.
The interest rate on the principal. This may not be necessarily the APR, which also includes closing costs.
The term of engagement means the number of years you agree to repay the loan.
The type of mortgage required: fixed-rate, ARM or interest-only etc.
The market value of the home
2018 Mortgage Companies, Brokers, Banks & Lenders
A mortgage company is an entity involved in the business of coordinating the activities of funding mortgages for residential as well as commercial property. A mortgage company markets itself to borrowers and also gathers funds from one or several financial institutions that provide the capital for the mortgage.
The web is one of the most significant informational resources around the world. It also provides a platform for people to engage the service providers outside of their area. With this type of unlimited access to information and services, the borrower can reach the service providers anywhere. With this theme of border-less interaction of resources, some well-known mortgage companies, brokers, banks and lenders from around the world are listed below for the readers:-
American Equity Mortgage
Amerisave Mortgage Corporation
ASC – America’s Servicing Company
Green Tree Mortgage
Navy Federal Credit Union
Pacific Service Credit Union
Sun Trust Mortgage
American Advisors Group, Inc.
Nationstar Mortgage Holdings
Wells Fargo & Company
A word of caution is here that go through every relevant material before doing business with any of the mortgage company, bank, broker or lender.
Difference between Mortgage and Other Types of Financing
When you are in the finance market for some credit, several financing options might be right for you. But before jumping to a decision, you should analyse carefully different financing options concerning the benefits. Only take any credit facility after you have understood the pros and cons. This understanding is essential because this may end in the loss of your home if borrowed amount plus interest is not paid in time. For your convenience some of the financing terms for mortgaging are explained below:-
Mortgage vs Home Equity:
Home equity loans work differently than mortgage loans. In home equity, the bank approves to borrow up to a certain amount corresponding the value of your home. The bank bounds your investment in the house as collateral for the granted loan. The benefit is interest rates are lower than the mortgage loan. Often home equity loans are sanctioned with a variable interest rate that changes with the market conditions.
Other benefits include that apart from mortgage loans, home equity loan does not have a preset monthly instalment plan. It works like a credit card where you will make a minimum monthly payment with revolving debt. You can draw money after paying the loan to clear bills or tax payment. Your home always remains at risk as you only pay a small amount of interest instead of principal but many people prefer this loan because of its flexibility.
Mortgage vs Loan:
Many people mistakenly take mortgage and loan the same. But in reality and technically both terms are far different from each other. The loan is a relationship that ties a lender and a borrower. In banking terms, the lender is called a creditor and the borrower is called a debtor. The money that changes hands in this business is known as a loan. The amount of money that is initially borrowed is called the principal. The borrower is bound to pay back not only the principal but also some additional charges, called interest. Usually, a loan is repaid in monthly instalments and the period of the investment is pre-determined.
But the mortgage as we discussed earlier is a type of loan secured by the collateral of real estate property. The mortgage binds the borrower (mortgagor) to make prearranged series of instalments. The lender (mortgagee) guarantees the right of foreclosure (can seize the property) by law if the mortgagor fails to pay off the mortgage amount.
Mortgage vs Home Loan:
A home loan is an amount that you borrow from the bank to buy a home. Home loans are paid back with either adjustable or fixed interest rates on the choice and financial credibility of the borrower. Home loans are drawn to buy a home only, especially not a commercial property. In the financial market, there are many different types of home loans, and the home loan given to you depends upon your business worthiness.
Whereas, mortgages are types of loans that are secured by any real estate and you need to repay the principal plus interest in full to own the property entirely. A mortgage is a legitimate document that confirms your agreement and obligation to repay your loan. The property purchased through the mortgage is the collateral that guarantees the lender that you will pay your mortgage instalments. In case of nonpayment of instalments, the lender has the right to foreclose your property.
Mortgage vs Rent:
The debate on whether you should mortgage or rent a property dates back to decades. However, there is no hard and fast rule because the decision differs from man to man depending on the financial conditions. But there is no doubt that the choice between mortgaging and renting a home is one of the most significant financial decisions to make.
Some people prefer to rent rather than mortgage a home subject to numerous factors, and financial condition is the most influential one. People decide to rent when the think that currently, they are not able to afford down payment for the home, have a poor credit history, under the burden of debt, or they think that shortly they will be able to save some money for down payment.
Another advantage is that when you live on rent, you are free from the responsibilities of repair and upkeep of the home. Another factor backing renting is some people are not sure how long they will stay, or some people want to relocate themselves after some time.
The theme behind mortgaging is that it makes you an owner of the home you live and the mortgage payment also helps you build equity in shape of the house. This equity may be used in many ways including getting a loan. Equity strengthens your financial worthiness.
There is also tax benefit in mortgaging as interest paid in shape of monthly payments may be tax deductible, which looks very small but may look great at the end of the year. On the other hand, typically rent is not tax deductible. As compared to monthly rental payments, your mortgage payments also improve your credit score if all instalments are made in time. In time mortgage payments radically help improve your credit rating which makes you credit worth in time of need.
Mortgage vs HELOC:
HELOC or home equity line of credit is also a type of revolving credit like home equity in which your home serves as collateral. It is also known as a second mortgage. This type of loan is not for buying a home, but your home serves as security to get credit for the purchase of significant items in life like education, home improvements or medical bills but not for day-to-day expenses.
Your credit limit depends upon the value of the home you own, and your credit limit is the maximum amount you can get at any time in case of need. Another advantage of HELOC is that it enables you to access some cash depending upon the home value and you only need to pay interest on that cash which you use and the rest that remains untouched bears no interest.
It is also very flexible as there is an option to pay the interest on monthly basis. But you may also choose to pay over and above that minimum payable. It is most beneficial in hard times like loss of a job or significant emergency expense incurred and when you cannot afford to pay large sums.
Mortgage vs Deed of Trust:
A Deed of Trust also known as Declaration of Trust is a legal paper stating the division of ownership of a property. It is used for joint ownership who have paid a certain amount of money into the purchase of a specific property, and this deed legitimately gives them right to get back their money with same proportion as they had invested.
A mortgage and a deed of trust are different in two ways. The first is the number of parties involved and the second what happens if the borrower fails to pay instalments.
Number of Parties Involved:
A mortgage loan is between two parties; the lender and the borrower. However, in a deed of trust, there is a third party, named “trustee” that holds the title of the home till full repayment of loan amount. In case of nonpayment of the loan, the trustee initiates the foreclosure process.
Failure to Pay the Loan:
The most important and distinct difference between a mortgage and a deed of trust can be seen in the case when a borrower fails to pay the loan. In case of a mortgage, the foreclosure process and the selling of property routes through the courts. This is called judicial foreclosure, and the lender has to file a lawsuit. But this process is avoided as it proves to be costly for both parties.
In case of a deed of trust, the courts can be bypassed. This is taken as non-judicial foreclosure, and it’s faster and less costly.
Apart from differences, both documents are secured by a property. Alien on a property can be placed legally. Alien enables the lender to sell the property if the loan is not paid by the borrower. We can say that both documents are used as a guarantee to make sure the borrower repays the loan.