A real estate loan is calculated on a mathematical formula, which is perhaps too complicated for the average borrower to figure out. The five main elements of the loan are Term, the Interest Rate,the Principal,the Final value and the Payment.
Term: Is the time period in which the loan is to be repaid. The standard period of a residential mortgage is 30 years with 20,25,and 45 year terms are less known but do exist.
Interest Rate: is expressed as annual percentage of APR. Interest rate for a 30year loan is higher than a 30-year Treasury bond, which serve as the national benchmark for mortgage interest rates.
Principal: is the total amount being financed. When you purchase a home this is the purchase price minus the down payment. The purchase price also includes a variety of settlement costs.
Final Value: at the end of a mortgage loan is nil meaning the loan has been paid in full. When a seller finances a real estate loan they often make it a short term loan with a balloon payment at the end giving the buyer to establish good credit and convert to a conventional loan.
Payment: Is the fixed monthly installment that is to be paid every month to pay off the loan.
For the purpose of a mortgage your financial position should consists of three components;
a) Essentially your income which gives you the ability to make monthly payments.
b) Your savings, which allow you to make a down payment, cover closing costs and keep some cash reserves to cover unexpected expenses.
c) Your management of other credit such as car loans and credit card balances.
There are a staggering variety of loans in the market usually designed to cater to the different needs of the borrower.
1) Amortized Loan: is the modern mortgage loan where the borrower makes equal monthly payments, which are part principal and part interest. There is a large proportion of interest in the beginning of the loan term and gradually shifts to a large proportion of principal toward the end.
2) Adjustable Rate Mortgage (ARM): About half of real estate loans are ARM. In this method the interest rate changes throughout the term of the loan and monthly payments fluctuate. ARM’S usually come with lifetime interest rate caps and annual cap.
3) Home Equity Loans: also known as second mortgage, this kind of loan allows you to borrow money based on the equity your home has built up over the years. Equity is the difference between the amount for which your home would be sold and the amount you still owe on your mortgage. This loan can be fixed rate or adjustable rate mortgage. Interest on a home equity loan is usually tax-deductible.
4)A Stated Income or No Document Mortgage Loan: allows individuals with difficult to document income to buy a home. With documented credit score and reasonably stated income you can qualify for a mortgage at a slightly higher rate. You also need to provide your social security number.
5) Hybrid Mortgage: start life as an ARM and can be converted to a fixed rate loan and vice-versa.
6) Conforming Loan: conforms to the purchase requirements of two major secondary mortgage market lenders.
7)Jumbo Loans: are non-conforming mortgage loans that do not meet the purchase requirements of the secondary mortgage lenders.
8) Wraparound Loans: a buyer purchases a property with the sellers existing loan still in effect. The seller continues to make payments on the original loan and the buyer obtains a new loan, which wraps around the first loan.
9) Short Term Loans: a loan with a term of 5 years or less with high interest rates.
10) Cash Out Refinancing Loan: a new loan, which replaces an old loan giving the borrower extra, cash out of the deal.
11) Bridge Loan: is a short-term loan, which fills the gap between two loans.
12) Reverse Mortgage: is targeted at senior citizens who are equity rich but cash poor. Reverse mortgage gives the elderly borrower a lifetime fixed monthly payment. When the owner dies the residence is sold, the loan paid off and if leftover, the cash goes to the heirs.
13) Straight Loan: Borrowers pay interest at the end of each year and the principal is due at the end of the loan period, which can be a short term of 5 years.
14) Balloon Mortgage:a short-term loan with a final balloon payment due at the end of the term.
15) Budget Loan: includes standard housing cost which are principal, interest, real estate taxes and insurance.
16) Package Loan:is a budget loan which includes personal property such as appliances.
17) Purchase Mortgage Loans: are financed by the seller.
18)Open-End Loan: are a type of home equity loans
19) Blanket Loan: involve more than one property offered as collateral.
20) Construction Loan: mortgage companies require you to own the land first before you apply for a loan. The standard construction loan will be based on one year.
21) Graduated Payment Mortgage (GPM): offers monthly payments that start out low and gradually increase. In the beginning the principal may actually increase by a process called negative amortization.
22) Shared Appreciation Mortgage (SAM):in this type of loan the lender gives the borrower a low interest rate in exchange for 30 to 60% of the property’s future appreciation. The more percentage of the appreciation the borrowers agree to, less is the interest rate. SAM are popular due to rising home prices and mortgage values.
If you find it difficult to qualify for a conventional loan, U.S. government loan programs from Federal Housing Authority (F.H.A) and the Department of Veterans Affairs (V.A) are helpful. Designed to promote home ownership they offer lower qualifying ratio and reduced down payments. F.H.A and V.A loans are not issued by the government but are made by private lenders who are protected by government insurance. Both F.H.A and V.A have maximum allowable amounts but require additional paper work before the loan is approved.