Different Types of Mortgage Loans

Posted by admin on May 4, 2009 under Types of Mortgage Loans | Be the First to Comment

There are Different Types of Mortgage Loans

Over time, many lenders have dreamed up different types of mortgage loans to fit the wants and needs of different types of borrowers. This article contains information on the most common mortgages, but by no means all of them.

The Conventional Loan

For years the most common type of mortgage loan was the conventional loan. The borrower put down 20% of the purchase price of the house and the lender lent 80% of the purchase price. The borrower (the mortgagor) paid the lender (the mortgagee) back over 30-years, but on a monthly basis. This situation meant that the borrower had to come up with a rather substantial amount of cash to close the loan. This meant a lot of folks kept renting.

Private Mortgage Insurance

Later, it was possible to put only 10% down and borrow 90% of the purchase price. The lender required, however, the borrower to purchase private mortgage insurance (PMI) to cover that extra 10% the lender provided. This was successful and many borrowers were glad to pay that insurance premium every month since 10% down was easier to handle than 20% down.  This program helped many folks become homeowners who otherwise would not have been able to do so.

VA and FHA Loans

When WWII ended, the Veteran’s Administration innovated a mortgage program whereby qualified veterans were able to purchase a home with little-to-nothing down. The VA did not make the loans (except in rare cases), but guaranteed the loan if the purchaser defaulted. Traditional lenders still made the loans. With FHA Loans, the Federal Housing Administration insured the loans, with the insurance policy paying off in those rare cases of foreclosure. FHA was not a no-down payment program, but a low-down payment program. Both of these programs were (and remain) very popular with buyers.

Adjustable Rate Mortgages (ARM)

Mortgage rates have traditionally been fixed over the life of the mortgage. However, lenders discovered that more borrowers would borrow more money if, at the time they borrowed it, the interest rate was low. So lenders came up with mortgage rates that would adjust over time. They started out low (usually below market rates), but then over time, increased until they were in excess of market rates. While state laws tended to limit the amount of interest rate increase over any given period, it was very common for borrowers to find that, after adjustment, their payments went up hundreds of dollars per month. Many could not afford this, so many adjustable rate mortgages have gone into default.

A sub-category of the adjustable rate mortgage was the negative amortization loan. With this instrument, the monthly payment from the borrower to the lender was not even enough to to pay the interest on the loan, much less the principle. As a result, many borrowers found that, when they went to pay the loan off, they owed more than they originally borrowed. This was not a popular loan option.

Reverse Mortgage

A fairly recent innovation is the reverse mortgage. With this instrument, instead of lending you a lump sum of money which you pay back monthly over a fixed period of time, the lender provides you with a monthly income, which you pay back in a lump sum (at sale, refinance, or with the proceeds of your estate at the time of your death). It has been popular with older home owners as it allows them to access the equity in their homes, a major source of their wealth in many cases.

Conclusions

These are all viable mortgage instruments. But only you can decide which one is right for you and your current financial and economic situation. Before you make any decisions or sign anything, you need to consult with a properly qualified professional or your attorney.  Use the mortgage calculator on this page to help answer your questions.  Good Luck!