What is a Mortgage?
A Mortgage is a legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of debt.
So, what does that mean exactly? Essentially, you (the debtor) can borrow money from a bank or creditor in order to buy a house. You pay back that loan at a specified interest rate over the course of a specified number of years. The creditor actually holds title of the property until the day that the loan is repaid in full (including interest), at which point the title is transferred to you.
Types of Mortgages:
There are three main types of mortgages, the Conventional, Jumbo and Government-Backed mortgages. It is important to understand the difference between the three in order to determine which type is best suited to fit your needs.
- Conventional: also called “conforming”, these loans comply with the guidelines and limits established by the Federal Housing Finance Agency (FHFA).
- Jumbo: these are also known as “non-conforming” because they exceed the limits established by the FHFA and are more suited towards buyers of luxury properties.
- Government-Backed: these loans are backed and subsidized by one of three different federal programs, the USDA (United States Department of Agriculture), FHA (Federal Housing Administration) or the VA (Department of Veterans Affairs). They often have lower credit score requirements and a lower (or zero) down payment. Each of these loans have certain requirements that a borrower must meet in order to qualify.
Mortgage Rates and Terms
There are two types of mortgages based on their interest rates: fixed-rate and variable rate.
Fixed-rate mortgages are loans that have the same interest rate over the entire life of the loan. The great thing about these is that your monthly payments stay the same from the day you close to the day you make your final payment, meaning no surprises. The loan terms, or length of time that you will be paying on the loan, usually range from 10 to 30 years.
Variable rate mortgages fluctuate with market conditions. Also known as “adjustable-rate mortgages” or “ARMs”, these loans begin with a fixed interest rate, but only for a specified number of years. For example, a 5-ARM loan has the same interest rate for the first 5 years. A 10-ARM loan for 10 years and so on. After the specific term, the rate resets yearly or monthly based on the market indexes. These loans can be very attractive up front because your initial interest rate is often lower than a fixed rate mortgage would be. However, because the rates can go up and down after that initial term, it is very possible that you would end up paying more in the long-run.
Now that you know all about the different types of mortgages available to you, we need to look at what factors a lender will look at to determine whether or not you qualify for one. You can find more information on that in my next post, How to Qualify for a Mortgage.
Ready to start shopping around for the best lender for you? Each lender is different, so it is important to do your homework. Here are some of my local favorites, as well as Money’s top picks nationally: