Mortgage refers to using the home and property as collateral for a loan. The mortgage and loan are separate papers.
Where to Find a Mortgage
Mortgages can be found through several avenues:
- Brokers are middlemen who bring together buyers and lenders (up to 200).
- Mortgage bankers work for the bank and only offer bank loans; sometimes they work for several banks.
- Commercial banks that make their money from account services, like Wells Fargo and Bank of America, offer competitive rate loans.
- Savings and Loans institutions only offer real estate loans, which can make the process easier.
- Credit unions usually have lower rates and fees as they aren't subject to federal taxes, but a buyer must join to qualify.
- Some stock brokerages, like Charles Schwab, now offer mortgages.
- Online brokers are becoming more and more popular, though many companies come and go. Make sure you find a reputable company to work with.
Down payments should be carefully considered. If less than 20% is put forth, the borrower will have to pay Private Mortgage Insurance (PMI), which is about 1% of the loan's value. Some lenders allow a second mortgage to pay the down payment, although it is not a common practice. Ask your lender about options available to you.
Points refer to the percentage rate, for example, 1 point equals 1% or $1,000 of a $100,000 loan. Lenders often let borrowers buy points to lower their interest rate. The first thing to ask a lender is how much it is to buy 1 point, then do the math to see if it will save money in the long run. Use an online calculator or ask your lender to run the figures. Usually the longer the loan, the better it is to buy points.
Mortgage Loan Types
The following are a list of loans you can secure with a mortgage:
Fixed Rate
- Offer the same interest rate for the life of the loan
- Typically offered for 15 or 30 years, though other options exist
- Sometimes have higher rates than other loan types, but you will always have the same payment
- Great if interest rates are low
Adjustable Rate (ARM)
- Interest rate is adjusted periodically to reflect market rates
- Payments and rates begin at a lower amount and then increase over time
- Increase rates have caps annually and for the life of the loan—a cap is the number of points a rate can increase so if you began with 5% and the cap rate is 1.5 points for the first year, then the rate can increase to 6.5%, but no higher during that year
- Good loan for short term ownership or plan on refinancing when terms are better
Balloon
- Usually have a lower rate than fixed rate mortgages
- Short term loan (5-7 years)
- Large portion of the payment is due at the end of the loan; some investors choose to refinance to pay off balance
Jumbo
- Larger than average loan (Fannie Mae & Freddie Mac usually loan up to $252,700, anything more is a jumbo loan)
- Each loan offers different terms and rates
Special Mortgages
- First time home buyers can opt into local programs. Perform careful research as these often have income caps, stringent terms, length of ownership requirements, or constraints on property value.
- Second mortgages are often sought by buyers to use their equity (or ownership) for home improvements, debt consolidation, or to purchase a second home. The second mortgage is second in line to the first mortgage; meaning if both are in default, the first mortgage will be paid first.
- Home Equity Line of Credit (HELOC) is a popular option for those not wanting to take on debt in a large portion and accrue interest only on used portions.
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