A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire purchase price up front.
Over many years, the borrower repays the loan, plus interest, until he or she owns the property free and clear.
Mortgages are agreement between a borrower (Homeowner) and bank (Mortgage Lender).
In many cases there is also a third side - Mortgage Broker
Conventional fixed rate loans are a safe bet because of their consistency - the monthly payments won't change over the life of your loan. This is your standard, plain-vanilla mortgage.
They're available in 10, 15, 20, 30, and 40-year terms but 15 and 30 are the most common.
Interest-only mortgages give you the option, during the first five or 10 years, to pay only the interest portion of your monthly payment instead of the full payment. You aren't required do this. This slows down your repayment time but can be useful in a pinch. Afterward, the rest of the mortgage is paid off in full like a conventional mortgage.
There are many different ARMs. The basic idea is that their interest rate changes over time throughout the life of the loan. The rate changes reflect changes in the economy and the cost of borrowing money. A common ARM is called the 5/1 loan - the interest rate stays the same for the first five years and then is free to change for the remaining 25 years.
These are mortgages guaranteed by the Federal Housing Administration. They come with built-in mortgage insurance to protect against the possibility of not being able to repay the loan. The required down payments are smaller with these loans.
These loans make it easier for veterans of the U.S. armed forces, and sometimes their spouses, to buy homes. They don't require a down payment and are guaranteed by the Department of Veteran Affairs.
The combo occurs when you put a down payment of less than 20% and take two loans of any type in combination to avoid paying Private Mortgage Insurance.
On a balloon mortgage, you pay interest only for a certain period of time - five years for example - and then the total principal amount is due after this initial period.
Jumbo refers to a mortgage that's too big for the Federal Government to purchase or guarantee. Currently, the limit is about $700,000. This means that the borrower wouldn't get the lowest interest rates available on smaller loans.
There are many similarities between broker and bank, along with a lot of key differences.
Once a prospective borrower makes contact with a mortgage broker and agrees to work with him or her, the broker will gather important financial information.
This includes income (tax returns, pay stubs), asset (savings account, checking account statements), and employment documentation, along with a credit report, all of which are necessary to assess the borrower's ability to obtain home loan financing. A retail bank would collect the same documentation, so no real difference there.