For most people buying a house outright is not possible but a steady job and income ensures that you can buy a home by picking up a loan that can be paid over a period of time.
A mortgage is a loan or lien on a property or a residence that has to be paid in a stipulated period of time say 15, 20, 30 or 40 years. The loan taken is to be paid monthly over a period of time and each monthly payment consists of the principal amount, the interest, taxes and insurance, known as the PITI, paid in a process called as the amortization schedule. In a mortgage there are two principals the mortgagor or borrower and the lender or mortgagee.
The mortgage document forms a lien on the property that secures the lenders interest in the property; it essentially provides security for the debt taken. The lien document is a public record and can be assessed by anybody. Right of ownership is totally the buyer's, one who has purchased the property, not the lenders. The mortgage gives the lender, the right to sell the secured property if the buyer defaults on the loan. This sale process is known as foreclosure. A judicial foreclosure is one that progresses through the court.
In the United States, most States utilize a mortgage as a security measure, but some States still use a Deed of Trust. A Deed of Trust is like a mortgage, recorded in public records as a lien on the secured property. A Deed Trust has three principals, the buyer, and the lender and a third party is the trustee, a person who holds temporary title till the debt is cleared. The trustee has the power to sell the property, if the loan is not repaid; this foreclosure process bypasses the court making it easier and cheaper to foreclose.
This is the most common type of mortgage option for people buying a home. You lock-in the interest rate for the entire term of the loan and the monthly amortization schedule remains the same for the life term of the loan.
The term of a fixed rate mortgage is mostly 30 years, followed by a 20 and 15 year term.
The 30-year fixed rate mortgage offers maximum tax benefits, since interest deductions are more. A 30-year mortgage is the easiest to qualify for.
In a 20-year mortgage the pay-off is faster, but interest rates are higher.
In a 15-year mortgage pay-off is faster but monthly payments are very high.
In an interest only FRM, The life of the loan is split into two halves. In the first half you pay only interest and no principal amount, hence monthly payments are lower. In the second half you pay both interest and principal, hence monthly payments increase in the second half of the term of the loan.
The use of this type of mortgage is that since initial payments are lower, you can pay for other expenses like furnishing the new home. Since payments increase in the second half you can plan your finances accordingly.
ARM is a popular type of mortgage loan since it begins with a lower interest rate and hence less monthly payments. This may allow a higher loan amount. Since interest rates change your monthly payments will increase or decrease accordingly, during the life of the loan.
The specifics of an ARM are:
In an interest only ARM, during the initial period you pay only the interest monthly. The term of the interest only period is set when the loan is qualified and after that the payments include the interest and principal.
Balloon Mortgage offer a monthly mortgage payment schedule of say 5, 7 years and at the end of the initial period you either reset the mortgage or pay off the balance in one lump sum (balloon). The advantage is that the initial payments are lower, but at the end of term you pay a large amount.
Many balloon mortgage loans have a reset option, meaning you can reset your interest rates to the prevailing market rates of the remainder of the loan term. This option is available if you are still the owner and resident of the house. You have been making regular and timely monthly payments. There is no other lien on the house.
If you do not qualify for a reset you can refinance your mortgage.
Balloon mortgages come with only one adjustment to the interest rates during the life of the loan.
There are two types of Balloon mortgages 7/23 and 5/25, in entity the numbers indicate the life of the loan i.e. 30 years. In the first option the balloon payment is after 7 years and 23 is the remaining term of the loan.
FHA Loans are insured by the Federal Housing Administration and cover lesser-priced homes. These loans are open to all qualified homebuyers and offer very low down payments of only 3-5%.
VA loans are issued by the Department of Veteran Affairs for all qualified military veterans. It is a long-term, no down payment loan.
RHS loans are meant for low income households in rural areas and the smaller towns. The Rural Housing Service (RHS) offers this low interest/ zero down payment loans.