What is Mortgage Loan? It is referring to a loan a person could take to aid their property purchase. The loan takes collateral on the borrower’s property, meaning that there is a legal mechanism that allows loaner to take possession of the property and to sell the property (foreclosure process) to pay off the loan if a borrower does not fulfill the loan terms such as making payments.
There are many types and categories of mortgage loans. Below are explanations of each category.
- Veterans Affair (a.k.a VA) loan – Eligible only to current or past military personnel. This loan type usually has best mortgage rates and allows 0% down payment. For further information – click here.
- First Housing Administration (a.k.a FHA) loan – This loan allows minimum down payment of 3.5% but usually has the worst mortgage rates. Note that FHA loan might appear to have better APR than Conforming loan based on quoted APR, but FHA has many additional fees such as higher closing cost and private mortgage insurance (PMI) and ends up being costlier than Conforming loan. For further information – click here
- Conforming loan – Regular loan. Backed by government agencies Freddie Mac and Fannie Mae. Maximum amount of loan is $417,000.
- Super Conforming loan – Accommodates higher house prices in some areas that cannot be satisfied with Conforming loan. Also backed by government agencies Freddie Mac and Fannie Mae. Maximum amount of loan is up to $721,050 and the maximum varies depending on the county. Please refer to link for 2014 limits. Mortgage APR is slightly higher than Conforming loan.
- Jumbo loan – Accommodates houses beyond the limits of Super Conforming loan. Maximum loan limit is not known although some say its practical limit is $2 million. Not backed by government agencies. Mortgage APR is slightly higher than Super Conforming loan.
Normal rates for Conforming, Super Conforming, and Jumbo loans require at least 20% down payment. If your down payment is less than 20% than either you won’t be qualified for a loan or will require a private mortgage insurance (PMI) or second mortgage which will increase the cost of the mortgage.
- Private Mortgage Insurance (PMI) – Additional monthly fee required if you are either buying a house with FHA loan or a down payment less than 20%. PMI can be removed if remaining loan amount is 78% or less of the house appraisal value. PMI monthly amount can be calculated here – link.
- Second Mortgage – Simply put, it is another mortgage on the property other than the primary mortgage. Second Mortgage can be used to get cash or buy a house with less than 20% down.
Mortgage loan can have two types of APR: Fixed and Non-Fixed (a.k.a. Variable APR, ARM – Adjustable rate mortgage).
- Fixed – APR is fixed throughout the mortgage payment life
- Non-Fixed (ARM) – APR can change (and thus changing monthly payment amount) throughout the course of mortgage payment life. “5/1 ARM” means that initial APR will be locked for “5” years and APR will be adjusted every “1” year thereafter according to general market APR. Usually starts with lower APR than Fixed APR loan but kicks in with higher monthly payment when initial APR lock period is over. Monthly payment fluctuates based on market APR. APR can either adjust up or down but typically it will adjust up because default/constant APR (called Margin APR) value is added on top of market APR (called Index APR) value to formulate the new APR.
There could be variation on the mortgage loan type such as loan duration and initial APR locking period for ARM loans.