Real Estate Mortgage Loans

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.

Types of Mortgage Loans

A Fixed Rate Mortgage:

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.

Uses of the Fixed Rate Mortgage

Protection against inflation: If interest rates increase the mortgage and its monthly payments are not affected. Further even if taxes and insurance costs raise your monthly payments remain stable.
Long term planning: Since you are aware of the PITI amount you will be paying through the term of the loan, there are no nasty surprises in store and you can plan other expenditures accordingly.
Low risk: stability in the loan re-payment is the biggest advantage in a fixed rate mortgage, so however the market fluctuates your payments remain stable. You know exactly what you will be paying for the entire 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.

Interest Only Fixed Rate Mortgage

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.

Adjustable-Rate Mortgage (ARM):

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:

Adjustment periods: The adjustment period establishes when and how the interest rates will change. In the beginning of the loan term is the fixed rate period which, may be of a month or last up to 10 years, during which the interest rates remain stable. After the initial period the interest rate is adjusted each year. For instance in a 3/1 ARM, the interest rate is fixed upto 3 years and hereafter it will change every year till the term of the loan.

Index and Margin: The change in the rate of interest during the adjustment period is calculated based on the 'Index' and 'Margin'. The index used for ARM is the LIBOR and the US Treasury Bill. The rate for the Index is based on fluctuating market conditions. The margin is the percentage amount added to the index to determine what the interest rate will be for that period.

Caps: This determines the limit to which the interest increases or decreases. A 'lifetime cap' is the maximum interest rate that will be levied in the term of the loan.

Numbers: 10/1,9/1,7/1, 5/1 and 3/1 are used in the ARM. For instance 10/1 means that the initial fixed rate period is 10 years and after that every one year the interest rates will change. Based on the initial cap the change is as high as 5% points.

Uses of ARM:

Since interest rates are lower than a fixed rate mortgage, the initial payments are also less and therefore you can qualify for a bigger loan amount.

If interest rates drop during the time of the loan, your monthly payments will also decrease.

An ARM with a low initial interest rate and an initial adjustment period, after 5to 7 years can actually save money.

Interest Only-ARM

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/Reset Mortgage

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.

Government Loans

FHA Loans:

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

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

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.