Ins-and-outs of Mortgages

By RealtyCrunch IncApril, 27th 2020
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Ins-and-outs of Mortgages

What is a mortgage?

Very simply speaking, a mortgage is a home loan. When you as a buyer decide to purchase a house, you’re allowed to pay down a portion of the price of the home (down payment)  while the lender (bank credit union etc) lets you borrow the rest of the money.

Once the transaction closes, the buyer is now permitted to move into the house and live there while paying back the money of the mortgage lender.. Typically on a 15 or 30 year schedule.

Similar to other loans, a mortgage is a trust between you and your lender.

Should a buyer not pay back the money, there’s a safeguard in place… the house is not yours until you pay back the loan in full

This is why your home is considered collateral that your lender can take away from you if you stop making your loan payments.

Two Main parts of a Mortgage:

  1. Principal - this is the loan amount borrowed from your lenders after making your down payment  ($500,000)
  2. Interest - amount charged on the principal over the course of the loan  (4% of $500,000)

Types of Loans

Conventional Mortgages: Loan that isn’t backed by the federal government that is fixed in it’s term and rate. Fannie Mae and Freddie Mac are government sponsored entities that buy conforming loans on the secondary mortgage market, pool those loans together, then sell them to investors as mortgage-backed securities in the open market.

The main difference between Fannie Mae and Freddie Mac boils down to who they buy the mortgages from.

Fannie Mae mostly buys mortgages loans from commercial banks, while Freddie Mac mostly buy mortgages loans from smaller banks “thrift” banks.

Conforming Mortgage Loans: Loans that conform to financing limits set by the Federal Housing Finance Agency (FHFA) and meet underwriting guidelines set by Fannie Mae and Freddie Mac. Benefits of a conforming loan include:

  • Often easier to qualify for.
  • Can have a lower mortgage interest rate.
  • May offer a lower down payment.
  • Can allow some wiggle room with your credit score.

The limits on a conforming loan differs from zip code to zip code. You should look up the limits for your target home search!

Nonconforming Mortgage Loans (Jumbo loans): Loans that don't conform to federal loan limit. Benefits of a non-conforming loan include:

  • Lower down payment requirements: Non-conforming government-backed loans usually have lower down payment requirements than conventional loans.
  • Larger loan limits: Jumbo loans give you access to higher loan maximums than conforming loans.
  • More types of property: a non-conforming loan may allow you to buy a type of property you can’t get with a conforming loan.
  • Lower credit: Many lenders offer customized non-conforming loan solutions to people with negative marks on their credit report. (I.E. you won’t be able to get a conforming loan for several years if you have a bankruptcy on your credit report)

Government-Insured FHA Loans: Loan that is backed by the US Federal Housing Administration and provided by an FHA lender

Government-Insured VA Loans: Loan that is guaranteed by the US Department of Veterans Affair

Government-Insured USDA Loans: Loan that is zero-down-payment for rural and suburban home buyers backed by the United States Department of Agriculture

Types of Mortgage Interest:

Fixed-rate mortgages (FRMs): loans that have an interest rate that stays the same for the life of the loan. Mortgages are usually offered in 15-year or 30-year repayment terms.

Pros:

  • Peace of mind that your interest rate stays locked in for the course of the loan
  • Monthly mortgage payments are the same

Cons:

  • If the interest rate falls, you’ll be stuck with your original APR. However, dont forget you can always refinance and start a new loan at a new interest rate!
  • Fixed rates tend to be higher than ARMs due to the convenience of having a APR that won’t change

Adjustable-rate mortgages (ARMs): loans that come with an interest rate that fluctuates or varies over time depending on market conditions.

Pros:

  • APRs on many ARMs may be lower compared to FRMs
  • Wide variety of adjustable rate loans (3/1 ARM, 5/1 ARM, etc.)

Cons:

  • The interest rate could also be subjected to an increase
  • Monthly loan payments can get more expensive based on a interest rate increase