Mortgage Loans & Its Types

Mortgage loans are loans taken from banks, online brokers or independent mortgage brokers by pledging property owned for purchasing a residential or commercial property or to refinance a loan.

Mortgage loans are usually for a 15 or 30 year period. Mortgage payments are evened out according to the number of years, rate of interest and the type of mortgage. The property purchased is used as security or collateral to obtain the debt. If the borrower of the loan defaults on the mortgage payments the lender has the right to sell the property by employing the foreclosure process.

To be eligible for a particular loan the lender examines the employment and income generation of an individual or family to assess that monthly payment can be paid regularly by the borrower. The three important aspects that are taken into consideration to qualify for a loan are:

  • Credit Score
  • Monthly Income and
  • Down Payment

Credit scores indicate the risk of offering a loan to a borrower. Higher the score lower the risk. Good credit scores also ensure reasonable terms of loan and lower rate of interest. Monthly income is evaluated to ensure expenses are not more than income. The amount paid as down payment reduces the risk of the lender to cover the full expense of the loan incase of default in payments.

There are different types of mortgage loans available to suit the requirements of different borrowers. Some common and popular types of mortgage loans are:

Fixed Rate Mortgages

As the name suggests such loans carry a fixed rate over the period of the loan. They are among the most popular mortgage products which are not influenced by interest rate rise or falls. The interest rates are locked and payments remain same despite rise or fall in interest rates. Fixed rate mortgages are most popular when interest rates decline.

Adjustable Rate Mortgages

Adjustable rate mortgages provide a fixed rate of interest for a specific period and thereafter resorts to an adjustable rate of interest. ARM fluctuate according to market interest rate changes after the fixed rate period is complete.

Sub-prime Mortgages

This is a mortgage scheme directed towards those who have a less than satisfactory credit score. Credit score ranges between 300-900 and a score below 620 qualify for a sub-prime mortgage. Considering that the risk is higher in lending a loan to a sub-prime borrower the monthly payments and interest rates can be high. Such loans are a profitable venture for lenders on account of earnings from pre payment penalty, interest charges or foreclosures. Prepayment penalty is a charge levied on the lender on account of paying the loan before due by either selling the property or refinancing the loan.

Jumbo Mortgage

There are specified limits to loans sanctioned to: single family, two families, three families, or four families. If your loan requirements exceed this limit you need a jumbo mortgage which charges a higher rate of interest. They are also known as non conforming loans as they exceed the limit set by Fannie Mae and Freddie Mac.

Balloon Mortgage

This type of mortgage allows borrowers a lower rate and monthly payments for a particular period. Such a period lasts for three to ten years. After the completion of the term the borrower is required to pay the principal balance as a lump sum amount. If applicable and possible the balloon mortgage can also be converted to a fixed rate or adjustable rate loan.

Home Equity Line of Credit

Popularly known as HELOCs they are variable rate mortgages in line with the prime rate. You are allowed to take credit up to your credit limit which is the maximum amount one can borrow under any plan. The interest payments are tax deductible and one can also pay previous mortgage by taking a percentage of the appraised value of the home such that the loan amount covers your previous loan balance and your current fund requirements.

The Interest-Only Mortgage

This type of mortgage requires only interest payments to be paid for a specific period of time following which the terms of the loan change and a new mortgage amount is derived. This new mortgage will be paid with principal plus interest payments for the remaining number of years.

Ten Questions to Establish a Mortgage Loan Broker Has the Refinance Mortgage Broker Service for You

1. What array of lenders do you as a Mortgage Loan Broker have on your lending panel?

Make sure that the broker you are dealing with is a Mortgage Loan Broker or Mortgage Planner who has access to a variety of lending institutions as opposed to a Mortgage Representative who only represents one lender and that lender’s range of products.

2. What is the best type of Home Loan that would suit my cashflow cycle and finance structure?

Make sure that the Refinance Mortgage Broker or Mortgage Planner demonstrates how the specific type of home loan will sustain your finance structure and maximise the use of your cashflow. It is vital that the method in which the loan payments are required to be made doesn’t limit the effective usage of your cashflow in minimising the amount of home loan interest payable.

3. Is it best to concentrate on the mortgage products with the cheapest mortgage interest charge?

If the response is an explicit yes, inquire as to why and move forward with caution! There is nothing wrong with cheap home loan interest rates provided the lending institution displays a track record of cheap interest rates and established funding! Mortgage products that appear to give a great deal may include high penalties, charges and costs, or may not offer the versatility of usage that you call for in the future. To prevent selecting a loan you could later regret, treat with caution a recommendation centred mainly on cheap interest charges.

4. What are the best home loan products to suit my direct circumstances and objectives, and how will they support any future plans I may have?

Make sure the Mortgage Loan Brokers proposal consists of no less than 3 home loan products that display fair comparisons among the products. Beware of a comparison that includes 1 product that seems to be far better than the other 2! Look for product features and product versatility that will permit you to amend the home loan product to meet your future ambitions and plans.

5. Aside from the fees and charges associated with the new home loan, what further fees and charges am I likely to incur?

Finance Institutions, Service Providers and Government Departments often charge costs connected with the financing procedure and often they may be a pricey surprise for the unwary. A valuable Mortgage Loan Broker or Mortgage Planner will provide you with a Loan Costing Sheet itemising all costs, charges & fees associated with the anticipated home loan procedure.

6. How do you get remunerated and what is your commission arrangement?

Asking for an explanation in writing of how your service provider gets paid for their act will assist recognize and reduce conflicts of interest. If the suggested Lender’s commission is by far the uppermost remuneration of all credit providers on the broker’s lender panel, proceed with caution as this may stand for a conflict of interest.

7. Do you provide your potential customers with a Mortgage Broking Agreement?

Not every Refinance Mortgage Brokers service is precise in what it will deliver as opposed to what it is that you want as a final product. Hence it is highly recommended that a Mortgage Broking Agreement be drawn up among the parties outlining the scope of services/products to be offered and payments associated with the work.

8. Do you perform FREE Yearly Reviews and what extra services do you give?

Discover how eager the broker is to remain in contact with you and confirm that your loan is satisfactorily ongoing meeting with your goals. What extra services does he or she give either directly or via referral that might possibly be of benefit to you and are there savings on hand if you bundle these services with that of the mortgage?

9. Where may I turn if we have a disagreement that cannot be sorted out?

Do you offer an External Dispute Resolution Service (EDRS)? Request the service provider to clarify the complaints process offered by their business, outlining who you might complain to and which EDRS they are a member of? A worthwhile Refinance Mortgage Broker will provide you with a personalised Financial Services Guide at initial meeting that will outline all the particulars of their complaints process as will their Mortgage Broking Contract.

10. Are you an MFAA certified Mortgage Loan Broker?

By dealing with a broker who is a certified MFAA member, you are doing business with a person that has fulfilled minimum standards of education, experience and ethics to sustain their membership status.

Hot Tips For Getting The Best Mortgage Loans

A mortgage loan is one of the most basic types of loans you can get from a bank, and meets one of the most basic of human needs, namely shelter. To this end, it is not quite as demanding as getting loans geared towards other things, especially luxury items. Still, because of the sheer amount of money involved in getting a housing loan, you should do your homework first before applying for a mortgage loan to keep yourself from biting off more than you can chew. Here are a few tips to remember when considering a mortgage loan.

Shop for the House Before Applying for the Loan – like with most loans, it’s best to get an idea of what you want before applying for the loan itself. That way, when you actually present your case to the one approving your loan, you can give more solid evidence of what you’re intending to do with the money you’re borrowing. To this end, though, you should shop within your means. Only consider houses that are within your budget, and situated within neighborhoods that are within your financial capacity as well. While mortgage loans are also available for people who are intending to finance the actual building of a house from the ground up, it’s easier to get a loan when you shop for a house that’s FSBO (For Sale By Owner).

Keep your Credit History and Financial Capacity in Mind – this will be a major consideration of the person approving your mortgage loan. Bad credit history ratings or unemployment are sure fire snags that will weigh heavily against your favor when applying for a mortgage loan. Make sure that you are financially stable and can back up the loan you’re going for, with enough income to cover the interest rate as well as the monthly balance of the mortgage given it’s deadline to finish paying it.

Use a Mortgage Loan Calculator and Consider Different Loan Packages – not all loans for mortgage are created equal. Some banks offer higher interest rates than others, and there are those that offer longer terms of payment for larger initial downpayments. Still others allow for additional payments on the mortgage aside from the monthly due and interest, and these additional payments are applied directly towards lessening the overall sum of the loan’s principal. With all the different packages available, choose one that you can work well with, and to help you with your calculations download a mortgage loan calculator program from the internet. This is an invaluable tool for keeping track of your mortgage.

Consider Using an Escrow – escrow accounts work in the favor of the lending institution; as such, getting one helps improve your odds of getting a base mortgage loan approved. An escrow account is essentially a separate account that you open that handles the taxes and insurance payments on your house for you. This favors the lender somewhat because escrow accounts are tied up with your mortgage, meaning the lender gets an additional bank account in your name. However, the advantage of an escrow account for the lendee is that it acts as a buffer for the additional payments that he or she would normally have to worry about aside from mortgage. With an escrow account, all payments are sent to the lender, and they take care of the paperwork and housing related bills for you.

Consider Investment Property Financing – if, and only if, you’re getting a mortgage loan to buy a house NOT to live in, but rather as an investment to resell later, you can apply for Investment Property Financing. The mortgage loan you get from this treats the property you’re buying as a commodity that you will eventually be reselling. The mortgage terms for this are different and a bit more lenient than that of a regular housing loan. Still, even if you intend to live in the house you’re buying, if you know that it’s going to be a temporary residence that you’ll be reselling in a decade or less, you should still be able to work it as an Investment Property loan rather than a straight Housing Loan.

Get Mortgage Protection Insurance – finally, be sure to get mortgage protection insurance. This will increase the monthly payments you have to make, but it has quite a few advantages. For example, if you happen to have only one primary breadwinner in the house that suddenly becomes unemployed, if the insurance policy ties in to that breadwinner as the sole person responsible for the mortgage payments, the insurance company will be liable to pay off the remainder of the mortgage off on your behalf. Tying a mortgage protection insurance plan into an escrow account helps keep things tidy, and while you may wind up paying a bit more monthly this way, the benefits far outweigh the extra cost.