How to get a mortgage and the type of mortgage to opt for are some of the key things you’ll have to sort out when you’re looking to buy your first home.
You shouldn’t end up with the wrong type of mortgage just because you couldn’t tell the difference or because your agent recommended one that turns out to be what you never wanted.
There’s only one way to figure out the type of mortgage that is right for you and why.
So here are the different types of mortgages as well as their Pros and Cons.
Types of Mortgages
Here are the most common types of mortgages first-time homebuyers opt for:
Fixed-rate mortgages are the most common types of home loans. They are large loans that borrowers are required to pay back over a long period of time.
Borrowers are often required to pay back within ten to fifty years depending on the agreement they had with the lender at the time of borrowing.
Fixed-rate mortgages come with a fixed rate of interest that borrowers can only change through refinancing the loan.
However, monthly payments are of the same amount throughout the loans’ lifetime and a borrower can pay extra amounts to clear off their loan swiftly.
In these loan arrangement, repayment is first made towards paying interests, and then the principal follows.
FHA Mortgage Loans
FHA mortgage loans are often given to first-time homebuyers who aren’t making a 20% down payment and who are low to moderate income earners.
FHA mortgage loans are also given to people with bankruptcy history or poor credit history.
While the FHA mortgage loan makes it possible for people without a 20% down payment to obtain a loan, they often require such high-risk borrowers to consider having a private mortgage insurance.
When high-risk borrowers obtain mortgage loans from lenders that are approved by the U.S. Federal Housing Administration (FHA), the FHA insures such loans.
These loans are not given by the government, rather they are insurance of loan that
However, there’s a cap on how much the government is willing to insure such loans.
VA Loans for Veterans
VA loans are just like FHA loans – the government is not the lender, but they insure or guarantee the loan offered by another lender.
In a situation whereby a veteran defaults on their loan, the government pays back the lender not less than 25% of the loan.
So the U.S. Department of Veterans Affairs insures the home mortgage loans obtained by military veterans.
There are several key benefits of obtaining a VA loan including the fact that veterans are not required to make any down payment when buying a home or to have Private Mortgage Insurance (PMI).
As a result of tours of duty which often affects veterans civilian work experience and income level, some veterans end up as high-risk borrowers who aren’t eligible for conventional mortgage loans.
Find out how you can get a mortgage pre-approval.
Other Types of Mortgages
There are several other types of mortgages and they include reverse mortgages, interest-only mortgages, and adjustable-rate mortgages (ARM) among several others.
However, fixed-rate mortgages is the most common type of mortgage and the 30-year fixed-rate system is the most common among them all.
However, there are some states where mortgages aren’t so popular.
Some states prefer the Deed of Trust system to the mortgage system. So how exactly does the Deed of Trust method works?
Deed of Trust
In the Deed of Trust method, a third party, regarded as a trustee, plays the role of a mediator between borrowers and lenders.
In this case, the property is given to a neutral third party who serves as a trustee.
The said trustee or mediator is allowed to hold the property until the borrower completes paying off the debt.
However, while the borrower is repaying the debt, he or she keeps the actual or equitable title to the real estate and takes absolute responsibility for maintaining the premises, except indicated otherwise in the Deed of Trust.
Nonetheless, the trustee or mediator holds the legal title to the real estate.
Types of mortgage brokers
There are three key types of mortgage brokers:
1. Pure Mortgage Brokers
This type of broker works only as a broker.
The pure mortgage broker (PMB) works with a potential borrower and obtain their financial information.
On his or her part, the borrower deposits some money with the PMB to clear off third-party costs.
The said money is deposited in a trust account.
Once the PMB gets the required information from the potential borrower, he or she gets the loan application ready and shops for potential lenders using the application.
Once a lender accepts the application and closes the loan, the PMB is paid a fee for his or her services.
This fee is known as a loan origination fee, and it is the amount paid for getting the required loan for the borrower.
This fee paid to the PMB is dependent on the B&O tax under the Service as well as other Activities tax group.
2. Correspondent Mortgage Brokers
This mortgage broker makes loans in his or her own name using the money provided by a bank or other institutions.
The Correspondent Mortgage Broker (CMB) is obligated to assign the loan to, or on behalf of, the same person.
On the closing document, the CMB is known as the lender.
As such the CMB is mandated to transfer the loan to, or on behalf of, the same lender who transferred it the funds.
As a result, the CMB is just an agent for the lender and is not responsible for the risk of interest rate instability etc.
The loan origination fee paid to the CMB is dependent on the B&O tax under the Service and Other activities tax groups.
3. Lending mortgage broker:
This mortgage broker uses its source of funding such as its line of credit without any compulsion to sell or assign the loan to the entity that provides the fund.
In this scenario, the LMB is responsible for transferring the funds to the borrower and is responsible for the risk of interest rate instability.
For the LMB, the net loan origination fees represent interests on its loans or investments.
The loan can be subtracted from the B&O tax if it is primarily secured by a first mortgage or via a Trust Deed on properties that are non-transient residential.