Home Mortgage Loan Basics
Shopping for a home mortgage loan can be very confusing. There are many different types of loans available from many different types of home mortgage lenders. The type of loan you ultimately choose should fit your individual needs and the type of property you are purchasing. How do you know which type of home mortgage loan is best for you? The answer to that question requires a bit of research.
The conventional home mortgage loan is the best known type of loan. The rates on these loans are usually attractive and may have the lowest monthly payment of other kinds of loans. The reason for this is that a fairly high down payment of ten to twenty percent is usually required. The down payment provides security for the lender because the amount loaned will be less than the value of the property.
Potential home buyers who cannot qualify for a conventional mortgage because of the down payment requirement may want to check into some other options. Home loans are made available from the Federal Government through the Federal Housing Administration (FHA). FHA loans are not issued by the Federal Government. Instead, FHA approved lenders make the loans to individuals. The loans are then guaranteed by the FHA. Both the borrower and the home being considered must adhere to certain standards laid down by the FHA. Interest rates on these types of loans are usually very competitive and the down payment requirements are much lower than for a conventional home mortgage loan.
Veterans of the United States Military have another option. The Department of Veteran Affairs offers a program to veterans of the Armed Forces which is very similar to the FHA loan program. Veterans, and the unmarried spouses of service members who died as a result of their military service, are eligible for these loans. The standards for these loans are a bit less restrictive than FHA loans and there is no limit to the amount of money the VA approved lending institution may loan.
Another type of home mortgage loan which has become popular in recent years is called an Adjustable Rate Mortgage (ARM). These loans have an interest rate which may change over the lifetime of the loan. The changing interest rate will cause the monthly payment to change, also. These loans usually have some protections built in. A periodic cap will limit the amount that an interest rate may change at one time. A defined adjustment period governs how often the interest rate may change. An aggregate cap limits the total amount the interest rate may change over the life of the loan. Some ARMS may also include a payment cap, which places a restriction on the total payment amount. Because payments may not move over a specified amount, this cap may result in a situation called negative amortization. A negative amortization occurs when the payment does not cover the entire increased interest due, so a portion of the interest is added to the loan balance.
A construction loan may be used to purchase vacant land and commence construction of a new home on the land. These loans are considered temporary loans and are usually advanced for several months. The loan amount is set at the beginning of the loan. It functions similar to a line of credit. The borrower takes funds as needed for the construction of the home. This is a great option for those who have the homesite, but need the starting cash.
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December 21 2008 08:00 am | Investment Property