Understanding Mortgage Loans

Posted on | August 6, 2009 | No Comments

Understanding mortgage loans

A mortgage loan is, for example, let’s say you want to go buy a house for $500,000 and you and the seller agree upon the terms. If you don’t have $500,000 sitting in your bank account, then you need to get a mortgage loan. Let’s say you do have $100,000 to put down for a down payment. Well, you have $100,000 but you still need to come up with the additional $400,000; that’s where the mortgage loan comes into play.

There are four basic types of mortgage loans:

1. fixed rate mortgage loans,
   
2. adjustable rate mortgage loans,
   
3. convertible mortgage loans and
   
4. balloon mortgage loans.

“Interest Only” mortgage loan

An interest only mortgage loan is where the payment that you’re not making is not a principle payment to reduce the mortgage. You’re just making enough interest payments to the bank to satisfy the lender; you’re not making any principal reductions into the mortgage loan.

“Fixed rate” mortgage loan

A fixed rate mortgage loan is where the payment will never change. For example, it is possible to get a 3 year fixed rate mortgage loan, and if you get a six and a half rate, it stays with you for 3 years if you keep that loan that long. But if you want to get an adjustable mortgage loan, in simple terms it just means that the rate, after a period of time, can adjust.

Difference between a conforming and non-conforming loan

With a conforming loan for a one-unit property, the loan balance is anything up to $417,000. Anything above that is considered jumbo or non-conforming. In the simplest terms, conforming loans; those loans can be with Fannie Mae and Freddie Mac. If it’s a jumbo or non-conforming loan, those loans have to be sold to Wall Street.

Mortgage Loan Basics:
Understanding Mortgage Loans

Adjustable Rate Mortgage

An Adjustable Rate Mortgage allows you to get a cheaper rate in today’s market, but you’re now participating in the bank’s risk. This is because after a period of time, that loan that you obtain now will adjust, and therefore could be at a higher interest rate. If you get a thirty-year fixed, that’s a security blanket because you don’t have to worry about the rate moving in a period of time. With an adjustable rate mortgage, you do.

How my mortgage loan interest rate goes up or down

Well, once you actually have the loan the rate can’t change on you unless you have an adjustable. So, if all of a sudden you have bad credit or what-have-you, your rate’s still going to stay the same.

FHA and VA loans

The Federal Housing Administration (FHA) is part of the U.S. Dept. of Housing and Urban Development (HUD). An FHA loan usually requires a lower down payment and must not exceed the statutory limit. Similarly, VA loans, backed by the Department of Veteran Affairs can offer lower down payments and terms if you qualify for one.

Conventional loans

Conventional loans may fall under the category of conforming or non-conforming. Conforming loans are backed by Fannie Mae and Freddie Mac, who set terms as to how much the loan may be for, what kind of credit requirements are involved and amount of down payment. Jumbo loans, above the maximum amount established by Fannie and Freddie can have higher interest rates.

When buying a house most people take mortgage loans from a bank for the amount they finance, or still unpaid.

When a loan is given, it is repaid with interest in equal monthly installments over a period of time, usually from 15 to 30 years.

Ever wondered about some simple basic math involved in that type of loan?

Say for instance you buy a house for 250,000. Then, you make a down payment of 15% of the purchase price and take a 30-year mortgage for the balance.

What is your down payment?

What is your mortgage?

Down payment = Purchase Price × Percent Down

Down payment = 25,000 × 0.15 = 37500

Amount of Mortgage = Purchase Price − Down Payment

Amount of Mortgage = 250,000 − 37500 = 212500

If your monthly payment is 1200 dollars, what is the total interest charged over the life of the loan?

Total Monthly Payment = Monthly payment × 12 Months per year × Number of years

Total Monthly Payment = 1200 × 12 × 30 = 432000

Total Interest Paid = Total Monthly Payment − Amount of Mortgage

Total Interest Paid = 432000 − 212500 = 219500

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