The term mortgage refers to a loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property serves as collateral to secure the loan. A borrower must apply for a mortgage through their preferred lender and ensure they meet several requirements, including minimum credit scores and down payments. Mortgage applications go through a rigorous underwriting process before they reach the closing phase. Mortgage types vary based on the needs of the borrower, such as conventional and fixed-rate loans.
Individuals and businesses use mortgages to buy real estate without paying the entire purchase price upfront. The borrower repays the loan plus interest over a specified number of years until they own the property free and clear. Mortgages are also known as liens against property or claims on property. If the borrower stops paying the mortgage, the lender can foreclose on the property.
Types of Mortgages
Mortgages come in a variety of forms. The most common types are 30-year and 15-year fixed-rate mortgages. Some mortgage terms are as short as five years while others can run 40 years or longer. Stretching payments over more years may reduce the monthly payment, but it also increases the total amount of interest the borrower pays over the life of the loan.
The following are just a few examples of some of the most popular types of mortgage loans available to borrowers.
- Fixed-Rate Mortgages With a fixed-rate mortgage, the interest rate stays the same for the entire term of the loan, as do the borrower's monthly payments toward the mortgage. A fixed-rate mortgage is also called a traditional mortgage.
- Adjustable-Rate Mortgage (ARM) With an adjustable-rate mortgage (ARM), the interest rate is fixed for an initial term, after which it can change periodically based on prevailing interest rates. The initial interest rate is often a below-market rate, which can make the mortgage more affordable in the short term but possibly less affordable long-term if the rate rises substantially. ARMs typically have limits, or caps, on how much the interest rate can rise each time it adjusts and in total over the life of the loan.
- Interest-Only Loans Other, less common types of mortgages, such as interest-only mortgages and payment-option ARMs, can involve complex repayment schedules and are best used by sophisticated borrowers. Many homeowners got into financial trouble with these types of mortgages during the housing bubble of the early 2000s.
- Reverse Mortgages As their name suggests, reverse mortgages are a very different financial product. They are designed for homeowners 62 or older who want to convert part of the equity in their homes into cash. These homeowners can borrow against the value of their home and receive the money as a lump sum, fixed monthly payment, or line of credit. The entire loan balance becomes due when the borrower dies, moves away permanently, or sells the home.
In real estate investing, below are some of the options you may choose from:
- Federal Housing Administration (FHA) loans The FHA loan is secured by the Federal Housing Administration and is very popular for first-time homebuyers. With an FHA loan, you can buy a multifamily unit. This is often a strategy used by homeowners, where they live in one unit and rent out the other units. Before the FHA loan is approved, you must have the property appraised by an FHA approved professional.
- Investment Property Loans Another option is to get an investment property loan. These loans are typically offered by national banks, private mortgage providers, and investor-only lenders. However, you will need to have a large down payment amount and excellent credit rating. Unfortunately, an investment property loan is not always easy to obtain. It can also be expensive in the long run as the interest rates tend to be higher. The requirements for an investment property loan are also more stringent and exhaustive, although it also depends on the lender. You will have to provide tax returns, pay stubs, and documentation to prove your current income. In addition, you also have to be employed by the same employer for a minimum of two years to show to the lender that you have a stable job. Also, the lender may assess the rental income generated by the property to ensure that it will yield a profit. For those who are retired, are working part-time, or have an unsteady job, an investment property loan is usually not approved.
- Hard Money Lenders This is also referred to as bridge loans, which are sometimes used by investors to finance a real estate property. These loans are usually issued by private companies and not by banks. Hard money loans can be approved very quickly, your credit rating is not important, and the lender has a great deal of flexibility. However, the downside to these loans is that they come with very high-interest rates, and the lender may use conservative methods to assess your property. Another disadvantage of this type of loan is that you usually have to repay it within a short amount of time. However, for people looking for a quick loan, hard money loans can be a good option.
- Home Equity Line of Credit (HELOC) This is very similar to a credit card. The lender allows you to withdraw money up to a set limit. The credit line is always available, and your monthly payments depend on your loan balance and interest. The HELOC allows you to withdraw money as often as you want over a certain period, but in most cases, you have to start paying back after 7-10 years. The long term costs of this type of loan are lower. However, the one major downside is that if you default on the payment, your home is at risk of foreclosure.
- VA Mortgages VA loans can be used to purchase multifamily units, but you must occupy one of the units to qualify for the loan. You can rent the other units out and use the rental income to cover your mortgage payments. However, you will need to undergo additional verification procedures if you go this route. Additionally, you must meet the military eligibility requirements for acquiring a VA loan.
Now that you know the different mortgage options, you can select the loan that suits your situation the best. For more insight, you may get in touch with us and we shall respond right away.