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Mortgage Loans

Trying to get a property? A house? A car? A mortgage is a type of loan offered by some financial institutions, designed to the purchase of a house or piece of property.

A mortgage is a secured loan, which means that the property secures the repayment of the debt and this loan amount goes according to this asset. If you were to fail in the loan repayment, you would take the risk of losing the property. In other words, the property acts as the collateral.

 

Breaking down a mortgage

As any other type of loan, the payments are monthly and they not only include interest rates but other specific amounts. So, if we are breaking down a mortgage monthly payment, it may include:

  • Principal: They are calculated from the total price of the property.

  • Interest Rate: The amount paid to the lender in exchange for borrowing the money.

  • Taxes: Most lenders collect property taxes that can be filled later by the borrower with their tax bill.

  • Mortgage insurance: Amount that covers any damage in the house that could affect its value.

  • Home insurance: It is an insurance policy that protects a mortgage lender from the lender's default on payments or any other incident (like death or incapacity of repayment).

 

Type of mortgages

Depending on the classification, there are many types of mortgages that are separated under criteria like type of rate, length,  type of government help, and more - even the homeowner’s age. 

 

Fixed-rate mortgage

This is one of the most popular options for a mortgage loan. It predicts a set monthly amount to pay the debt, including the interest rates in an overall amount. This could be beneficial for borrowers because if rates start rising, they still pay the set amount agreed before signing the contract, which means a way to make it easier for the borrower to repay and provides estability for them.

In this type of mortgage, loans tend to have lower interest rates when they are shorter in loan’s term. They loan terms usually offered are:

  • 40-year fixed-rate mortgage

  • 30-year fixed-rate mortgage

  • 20-year fixed-rate mortgage 

  • 15-year fixed-rate mortgage

  • 5-year fixed-rate mortgage

The most commonly used and offered by the entities are 15-year and 30-year mortgages.

 

Adjustable-rate mortgage

The adjustable-rate mortgage (ARM) has different amounts every month. The interest rates and monthly payments fluctuate because it is tied to an index - a measure of international interest rates - and a margin - a fixed number of percentage points that is added to your index, which determines your total interest rate -, both established in the market and dependant on the current economy. This makes the rates different over time throughout the life of the loan.

Depending on the organization of the payments, they can be:

  • Variable-rate ARM: has fixed payments but interest rates teng to change, affecting the final monthly paid amount.

  • Hybrid ARM: These mortgages have an initial fixed rate for a particular period of time. The introductory period is usually 3 or 5 years.

  • Option ARM: Offers the customers different 4 types of repayment: a set minimum payment, an interest-only payment, a 15-year amortizing payment, or a 30-year amortizing payment.

  •  

Government-backed mortgages 

These loans are insured by the federal government and its entities, which means that if the lender fails in the repayment, the entity is responsible for the debt. States and localities also offer their own mortgages option. But federally, the three more common mortgages are:

  • FHA → It is provided by the Federal Housing Administration. Since the required payments are very low with this loan, it is highly recommended for people with bad credit or first-time buyers.

  • USDA Loans → For rural areas, the United States Department of Agriculture offers homeownership with low down payments for those who are seeking to get a house in those areas.

  • VA Loans → The Veterans Affairs also offer loans for military service members and their families without monthly payments. But they may have to pay a funding fee which can run between 1.25% and 2.4% of the debt total amount.

  •  

Balloon mortgages

This type of loans only require the borrower to pay interest for a set time - usually a few years. After this period and since the loan is not amortized, the borrower may have to pay a substantial amount, called balloon payment, in order to close the loan. These mortgages tend to be shorter than the traditional ones.

 

Reverse mortgages

A reverse mortgage is for seniors only (60+ years old). This one basically converts the home equity in cash by getting monthly payments from the financial entity. So, usually in mortgages, the borrower is the one that pays the lender, but in this case the lender pays the borrower for its home equity. 

 

Jumbo Mortgages

This mortgages exceed the regular mortgage amount offered by the lenders as a conventional mortgage loan. This limits are established by the Federal Housing Finance Agency (FHFA) and tend to be around $600,000 and require a minimum FICO credit score of 700.

 

Combination Mortgages

A.K.A combo loan is two separate mortgage loans on the same property, from the same lender to the same borrower. Usually, the first loan will get the borrower about 80% of the mortgage and the other one will provide the rest. This can vary depending on the borrower’s need.

 

Pros and Cons of getting a mortgage

PROS

CONS

  •  

  • ✅ Achieve to purchase a property or get a homeownership

  • ✅ Lower interest rates than other types of loans (cost- effective)

  • ✅ Many mortgages options for a tailored loan

  • ✅ Tax benefits

  • ✅ Easy to repay

  • ✅ Government's initiatives to support and help homeownership

  •  

  • ❌ Long time of repayment

  • ❌ Risk of losing the property

  • ❌ Additional fees, charges and add-ons

  • ❌ Loss of value of the property

  • ❌ Huge overall repayment amount

 

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