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Mortgage

In an ideal world, people would always have the cash necessary to buy a home straight away. In the real world, owning a home is one's largest and most important purchase in life, and most people have to take out a mortgage, which is designed to help paying for it. In many countries home purchasers seek to be funded by a mortgage.

By a definition, mortgage is a long-term loan given by a bank or some other lending institution and secured by real property. Undeniable advantage of mortgage is that it allows a borrower to live in the house while making payments on the purchase price of the home.

Mortgage can be repaid over extended periods of time. Terms can range from 10 to 30 years, with longer terms offering the advantage of lower monthly payments. A mortgage's interest rate reflects the lender's risk and a deadline when the loan must be paid off. In case a borrower fails to make timely payments, the lender has the right to repossess the property.

Your monthly payment on the mortgage loan will include an amount for the principle amount of the balance, an amount for interest owed on that balance, real estate taxes and homeowner's insurance.

In order to take out a mortgage, a borrower must qualify for the mortgage loan. To qualify for a mortgage, a potential buyer should meet some financial requirements. It means that your credit must be in good shape and your income must support the loan you intend to receive. Your qualification will largely depend on the following factors: your monthly income, employment, credit history, debt, property, the amount of money which will go for a down payment.

Before making a decision, mortgage lenders will carefully consider your personal finances. Your own personal financial situation is the major criteria for qualifying for different property value. Lenders want to make sure your monthly mortgage payment won't exceed 28 percent of your gross monthly income. Your combined mortgage payment and other debts must be no more than 36 percent. You can be allowed to exceed this percentage only if you have an excellent credit history or can make a large down payment on the loan. The more risks the lender takes, the higher the amount of the down payment is likely to be.

A promissory note and a deed of trust are the two important legal documents a mortgage involves. The promissory note (a mortgage note or real estate note) is basically a note in which the buyer promises the lender to repay the amount of the loan plus interest. The note states the interest rate, other payments (including escrow payments for property taxes and insurance), the terms and provisions. It also includes the actions the lender may take if the buyer fails to make the required payments.

Depending on the state, the borrower gives the lender either a mortgage document or a deed of trust. A mortgage involves only two parties: the borrower and the lender, while a deed of trust involves three parties: the borrower, the lender and a third-party trustee. The trustee holds temporary title until the debt is paid. In case the debt is not paid, the trustee may sell the house. With a mortgage, the borrower has full title to the property. However, the borrower cannot transfer ownership until the lien is released and the debt is paid off. If the debt is not paid, the lender has the right to sell the property, using judicial foreclosure.

Mortgage interest rates come in several types. One of the most common types is a fixed rate mortgage, in which the principal and the interest rate remain the same throughout the life of the loan. Fixed rate mortgages vary and a consumer has a choice between such types as 30-year fixed rate mortgages, 15-year fixed rate mortgages, biweekly mortgages, "convertible" mortgages etc.

Predictability of costs and protection against future rate increases regardless of the economy changes are the major advantages of fixed rate mortgages. Your monthly mortgage payment won't change. In case the prime interest rate goes up during the life of your loan, the lender will have to pay the difference. Lenders charge high interest rate to make up for the risk, and the longer the term of the loan, the more total interest you will have to pay. At the same time, if market rates drop lower than the rate on the loan, payments will still remain the same and won't drop. To take advantage of lower interest rates, borrowers will have to refinance.

Adjustable-rate mortgage (ARM) (also known as variable rate mortgage or floating-rate mortgage) is based on an economic index and has interest rates that fluctuate depending on that index during the life of the loan. It is a variable rate which adjusts up or down annually or on a schedule the lender and borrower have agreed upon.

Most adjustable-rate mortgages start with a fixed rate for an initial period of time, after which the loan converts to an adjustable-rate. The interest rate on this type of mortgage is lower than on a fixed-rate mortgage. However, you cannot predict the interest rate it will adjust to after the initial period. Homebuyers who consider adjustable-rate mortgage should secure their income will be adequate to possible rate changes.

The features of fixed-rate and adjustable-rate mortgages can be seen in the alternative hybrid mortgage (sometimes also called a fixed-period ARM or an intermediate ARM). It starts with a fixed interest rate for a period of time up to 10 years. After that the loan converts to ARM, adjusting every year.

The advantage of the hybrid mortgage is that the initial interest rate for the fixed-rate portion of the mortgage is usually considerably lower than the rates on a 30-year fixed mortgage. Since the monthly payment will be lower, it's easier to qualify for this mortgage type. However, when the fixed-rate period expires, you never know how high interest rates will be. If you belong to homeowners who would sell or refinance their houses after five to seven years, you should consider a hybrid mortgage as an option.

With most mortgage types you pay off the loan by making monthly payments over the loan term. A balloon mortgage is a short-term fixed-rate mortgage type, in which you make the same monthly payments that you would for a 30-year loan, however, after a certain time, often a 7-year term, the loan payments will "balloon." It means that the borrower will need to pay off the entire remaining balance of the loan. When the balloon payment is due, you will need to either pay off the balance or sell your home before the end of the specified term, or refinance your loan to pay it.

A balloon mortgage offers a lower interest rate during the repayment period, but you have to be ready to pay off your loan at the end of the specified term. This type of mortgage is quite risky since if the borrower fails to pay off the balloon payment, he/she risks foreclosure.

There is also an interest-only option of mortgage. It involves regular payments consisting of one hundred percent interest and no principal payment during the interest-only period. When that period ends, the borrower starts paying the principal and the interest or he can choose to refinance or pay the balance in a lump sum.

Interest-only mortgages may be a good choice for business owners with unpredictable incomes, for those who expect to earn large sums of money in a few years, or for someone who has a strategy for investing the savings made on the difference between an interest-only mortgage and an amortizing mortgage.

It should be added that government-backed loans have played a very important role throughout the economic history of the United States. By providing affordable loans, different government-backed mortgage programs and initiatives were designed to help people recover from economic difficulties.

As we see, there are a number of loan programs for homeowners, as well as many variations on terms within the basic mortgage types. There are also commercial mortgages available to finance the development of businesses, avoid bankruptcy, enable residential and commercial investment, property development, etc.

Senior citizens of 62 years or older may consider reverse mortgages, - loans against one's home that mustn't be paid back for as long as one lives in the house. The total loan must be paid back only when the last surviving borrower dies, sells the home, or moves away.

The US has the most active mortgage market in the world, which makes the choice quite difficult for consumers. Mortgage decision is extremely important and should be taken with proper knowledge and caution. The mortgage type which will work for you depends on your personal financial situation, economic conditions, your tolerance for risk, etc. It is vital to know all benefits and drawbacks of different types of mortgages in order to take the smartest decision for your future.