One of the major financial sectors in the United States is the Mortgage loan industry or simply Mortgage. It is basically a way to create a lien on real estate using a contract. Using Mortgage, any individual or business can buy either residential or commercial property without having to pay the total amount of that property upfront. The borrower is called the Mortgagor and uses a mortgage to pledge real property to the lender (Mortgagee). This property is used as a security against the debt for the remaining value of the property the Mortgagor intends to buy. At the time of creating a mortgage, the legal title of the property (security against debt) is given to the Mortgagee and an equitable title is given to the Mortgagor.
Any mortgage device consists of – the Mortgage (or the pledge) and the Note (known as a promissory note sometimes) and to protect the lender, the mortgage is recorded in the public records. Let us take a look at some of the types of Mortgage loans that you should know about:
• Fixed-rate mortgage: In fixed mortgage loans, the interest rates stay the same over the entire term. The term is usually 15, 30 or up to 30 years and even if the interest rates fall, you will still be paying a higher rate.
• Adjustable-rate (ARM) or variable-rate mortgage: ARM mortgage loans offer a lower initial rate of interest as compared to fixed rate loans. The loan rates fluctuate throughout the life of the loan right after the initial period. This way, when the interest rates hike, your loan payments automatically rise up.
• FHA (Federal Housing Administration) loan: This type of mortgage loan allows the buyer get one low down payment. However, the buyer has to be the one who does not qualify to obtain a home loan. The flipside of this loan type is that the size of the loan may be limited.
• VA loan: VA loan offers guaranteed loans for veterans, active duty personnel and surviving spouses. It offers competitive rates with low or zero amount of down payments. Again, on the flipside, the size of the loan may be limited.
• Balloon Mortgage: In Balloon Mortgage, a fixed rate loan is offered to the mortgagor with relatively low payments. Also, the period of the loan is fixed. But this loan can be risky for certain mortgagors as after an initial period, the entire balance of the loan is immediately due.
• Interest-only: In Interest-only mortgage loan, the mortgager pays only the interest on the loan. This interest is in the form of monthly payments for a fixed duration. However, after the initial period, the balance of the loan amount becomes due, which results in higher payments or paying a lump sum or refinancing.
• Reverse mortgage: This allows seniors to convert equity in their homes to cash. You don’t have to pay back the loan and interest till you live in the house. However, this leads to aggressive lending and false claims made by unscrupulous lenders. To avoid this situation, borrowers must check whether the loan is federally insured or not.
These are some of the basic types of mortgage loans that you can avail. However, before taking the final decision, you must consult your financial advisor and then opt for it.