In case you need to purchase a house, you’ll require the assistance of a mortgage loan. Here’s your manual – what is a mortgage loan and how does it work?
So, you’ve just found the house of your dreams, you’re on cloud 9, but wait … you forgot something. Who’s going to pay for it? This is where you’ll require the assistance of a mortgage loan.
Informally, a mortgage loan is simply referred to as a loan that you take while buying a house. Or, the term, as a whole, is synonymous to purchasing a house. But, formally, a mortgage loan is a special type of legal contract or a ‘secured contract’ referring to the purchase being secured, however, if you fail to pay the loan as well as the interest on it, the lender – usually a bank or a lending society – takes possession of the property in question until the money is recouped.
Like every other important thing in life, it’s better if you take a little extra time out to hunt for the best mortgage loan deals out there. It is additionally crucial to know the diverse types of mortgage loans, various types of mortgage lenders – including banks and financial organizations – as well as the interest charges and the terms and conditions.
To make it simple, when you take a mortgage loan, the lender lends you a significant portion of the value of the property, usually around 95%. The remainder portion, usually 5%-10%, is provided by you from your own savings or bank account.
Further, since it is a ‘secured contract’ the lender secures the loan on the property after you agree to pay it back with interest over a period of time that is usually around 20-30 years.
After you’ve paid the loan back to the bank or the financial organization, the property will be officially yours.
What are the types of Mortgage Loans?
If you’ve understand the basics of a mortgage loan described above, then you might want to learn what type of mortgage loans are available out there. Here’s your guide.
Type 1: Adjustable vs. Fixed Rate Mortgages
In the event you’re trying to borrow a mortgage loan, you must know that all mortgage loans are basically divided into these two categories. You must first learn to decide what you want for yourself. Here’s a basic difference between the two of them:
Fixed-rate mortgage loans are the type of mortgage loans that have the same rate of interest on them throughout the process. It means that you’ve to pay the same amount of interest every month or every year. Or, in other words, the rate on interest remains constant.
However, Adjustable-rate mortgage loans are the loans on which the rate of interest changes throughout the process. In these type of loans, the rate of interest remains constant for a short period of time, mostly for a year, and then starts fluctuating from one year to another.
Type 2: Conventional vs Government-Insured Loans
Now that you’ve decided whether you want to borrow a fixed-rate loan or an adjustable-rate loan, you might want to consider some other options. One of these options include deciding between a conventional or a government-insured mortgage loan.
A conventional mortgage loan is a type of mortgage loan that is not backed by government or any other federal financial institution or authority.
Government-insured mortgage loans, on the other hand, are divided into three sub-categories as:
- VA Loans are offered to the military men as well as their families by the US Department of Veteran Affairs.
- FHA Loans also known as Federal Housing Administration mortgage loans are offered by the Department of Housing and Urban Development.
- USDA Loans are offered to rural inhabitants who have a low or a modest income and are unable to afford a house by US Department of Agriculture.
Type 3: Conforming vs. Jumbo Loan
Type 3 mortgages depend upon the amount of money that you’re trying to borrow from the bank or financial organization. Here’s how they differ:
A Conforming Mortgage Loan is known as the one that follows the endorsing rules of Freddie Mac or Fannie Mae, specifically where amount is considered. Fannie and Freddie are the two government-controlled partnerships that buy and offer mortgage-backed securities (MBS).
A Jumbo Mortgage Loan, however surpasses the conforming mortgage limits built up by Freddie Mac or Fannie Mae.
An Overview of Best Mortgage Loan Lenders
In case you’re wondering where you should look in order to find the best Mortgage deals, we’ve got you covered. Here’s a complete list as well as the pros and cons of the most authentic lenders you’ll find out there.
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