A mortgage is a type of loan that you use when you buy a house. It uses your house as collateral and they are usually amortizing, which means that when you make monthly principal and interest payments, after a period of time it will pay off the loan. Mortgages usually last for periods of 15, 30, or even 40 years and may have either a fixed or adjustable interest rate. Mortgages usually require a 20% downpayment initially.
Usually mortgage loans don’t just include the payment plus interest, but there are also separate fees for property taxes and homeowners insurance that are due monthly. These extra payments are set aside in an escrow account to be divided up later when the insurance and taxes are due. If a mortgage has a PMI or government loan along with it, there may be even extra that is due to cover these costs.
There are other types of mortgage loans such as “non interest” loans where the buyer pays monthly on the interest only and not the principal of the loan. Or there are other loans where the buyer may choose whether to pay the accrued interest or the portion of the principal balance.
If you choose a non-traditional loan such as those mentioned, beware that it can change your monthly payment depending on the current interest rates. Be sure that you thoroughly understand the terms of the loan before getting into it.
There are even bi-weekly mortgage options where the home buyer pays on the loan every two weeks instead of monthly. If this sounds like it suits you better, ask your lending institution if you qualify.
If you are a homebuyer who can afford a slightly higher monthly payment, then you might opt to get the 15 year mortgage rather than the 30 year mortgage. The benefit is that the interest payment will be less and the loan will be paid off quicker. Plus you will pay far less interest over time with a 15 year mortgage.
If you have conventional mortgage, it means that you have a mortgage that is not insured by the government. If you have put less than the 20% down for your downpayment, you will most likely need private home loan insurance which will protect the lending institution if the homeowner has the inability to pay. Fannie Mae and Freddie Mac are the two primary purchasers of conventional loans and while they don’t lend money, they can help the homeowner who has less than the required 20% downpayment.
There is also government assistance for those who can’t afford to buy a house. You can get a loan from the Federal Housing Administration (FHA) that will insure the loan and will let the buyer get away with spending the normal 20%. Generally the home buyer will have to pay 3% plus closing costs with this type of insurance. There is a maximum for the FHA-insured loans that range per area and median house values, but generally the maximum ranges from slightly over $150,000 to $300,000. You’ll have to contact your local branch of the FHA to find out what the maximum FHA-insured loan is in your area.
If you are a military veteran, you may also qualify for a VA-insured loan. This type loan is guaranteed by the Department of Veteran’s Affairs (VA) and it may let you get by with little or no downpayment. Check with your local VA to see if you qualify.
The Rural Housing Service (RHS) offers a couple options of housing loans for those living in rural areas. They have a Section 502 Direct loan that offers lower interest rates to lower income families living in rural areas. You can find out more information about these loans through the local USDA office or county agents. But there is a limited amount of funding for Section 502 Direct Loans so you may have to get it conjunction with a “leveraged loan” which will give you a “blended” interest rate with the Section 502 Loan that will still be lower than the current market loan.
If you are a first time home buyer you may be able to get a loan through the State Housing Finance Agency (HFA). Oftentimes, first time home buyers may be able to get a loan with an interest rate below the market rates. However qualifications will be different from state to state.
When you have a fixed-rate mortgage, your interest rate stays the same through the entire term of the loan. However if you have an Adjustable Rate Mortgage (ARM) the interest rate will change from time to time and therefore make your mortgage payments fluctuate as well. ARMs are usually set in periods of 1, 3, 5, 7, or 10 years. There is another option called “Hybrid ARMs” that have recently become popular in the fact that they have lower interest rates in the beginning and then after the period of time turn into a 1 year ARM. Initially the interest rates on ARMs are lower than those of a fixed rate mortgage for the same amount. However you assume some risk because of the fluctuation of the interest rates. In the long run, your ARM may be less than a fixed-rate mortgage, but you run the risk of having it go higher as well.
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