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An Introduction to Mortgages
A Simple Guide to Mortgages
Realtor Mike Kwiatkowski is a Wisconsin-licensed Real Estate Broker. He is not a licensed mortgage broker. However, he is pleased to assist his clients locating a mortgage lender. The following information is a basic summary of mortgage loans. It is provided as a courtesy and should only be used for informational purposes. This information is not legal or loan advice. While you know that more than one type of home is available, you may not be completely familiar with the different types of available mortgages. There are four standard types of mortgages:
Similar to comparing potential homes, you should explore the advantages and limitations of each loan. Be sure to shop for the best mortgage interest rate. Treat shopping for money just like shopping for a car; get quotes from as many mortgage providers as possible! Jumbo Mortgages Jumbo mortgages are mortgages in amounts above the conventional mortgage loan limit. Generally speaking, this loan amount limit is $417,000.00. While the Housing and Economic Recovery Act of 2008 (HERA) raised the limit to the lesser of $729,750 or 125% of the median home value in the metropolitan area, mortgage lenders have generally disregarded HERA and maintain the lower $417,000 limit. Jumbo mortgages are considered more risky for lenders when compared to conventional mortgage loans. They are considered more risky because it is more difficult to sell luxury residences quickly and at full price compared to a standard home. Lenders attempt to cover this risk by demanding a larger down payment, charging higher interest rates, and by requiring two or more independent home appraisals. In addition, lenders often charge more to refinance jumbo mortgages. Fixed Rate Mortgages Fixed-rate mortgages are loans where the interest is fixed at a certain interest rate. These loans are usually best for those planning to settle in their home for long periods of time and for those concerned about an interest rate hike. Those who intend to move within a few years or those who believe that interest rates will fall may not be best served by a fixed-rate mortgage. 30-Year Fixed Rate Mortgage This is the most common form of mortgage loan and has the lowest monthly payments. A 30 year fixed rate mortgage keeps monthly payments as low as possible. While this mortgage has the highest interest costs, it allows for the greatest mortgage interest deduction on the buyer’s income taxes. Equity builds the slowest due to the high amount of interest. 20-Year Fixed Rate Mortgage A 20-Year Fixed Rate Mortgage pays the loan off in 2/3 the time of the 30 Year Fixed Rate Mortgage. Unfortunately, this comes at the cost of high monthly payments. While the interest paid is lower than the 30-year option, the buyer receives a smaller mortgage interest tax deduction. Equity builds more quickly than with the 30-Year Fixed Rate Mortgage. 15-Year Fixed Rate Mortgage A 15-Year Fixed Rate Mortgage pays the loan off in half the time of the 30 Year Fixed Rate Mortgage. Unfortunately, this comes at the cost of high monthly payments. While the interest paid is low, so is the mortgage interest tax deduction. Equity builds more quickly than the 20-Year and the 30-Year Fixed Rate Mortgage. Adjustable-Rate Mortgages (ARM) An Adjustable Rate Mortgage, or an ARM, is a loan where the interest is fixed at a certain interest rate for a period of time. After this period passes, the interest rate fluctuates depending upon current market conditions. These fluctuations will change your monthly payments. Each financial institution will have its own policies regarding how the borrower’s interest rate is calculated. Borrowers must understand the policies that determine their interest rate. Federal Housing Administration (FHA) Loan The term “FHA Loan” is a misnomer. The Federal Housing Administration does not issue mortgages. Instead, it guarantees fixed rate and adjustable mortgages issued by qualified private lenders on 1-4 family dwellings. FHA Loans allow potential borrowers to put down as little as 3.5% as a down payment. Furthermore, potential buyers may receive up to 6% in closing cost assistance. FHA Loans sometimes allow for blood relatives to co-sign for the loan without residing with the homebuyer. Veterans Administration (VA) Loans As with the FHA Loan, the term “VA Loan” is a misnomer. The Veterans Administration does not issue mortgages. Instead, it guarantees fixed rate and adjustable mortgages issued by qualified private lenders on 1-4 family dwellings. Unlike FHA Loans, VA Loans only serve eligible US military veterans and their surviving spouses provided that the spouse has not remarried. VA Loans allow potential borrowers to purchase a home with no money down. A fee ranging from 0-3.3% may be applied to the loan; this fee may be included in the loan. VA Loans will also allow a qualifying individual to qualify for an amount larger than is acceptable for a traditional confirming loan. The maximum amount varies by county. Private Mortgage Insurance (PMI) PMI is the private, non-government equivalent of a FHA or a VA mortgage offered by private companies. The purpose of PMI is to guarantee a portion of a mortgage loan in order to reduce the lender’s risk in the event of foreclosure. Lenders decide whether or not they will require PMI. Companies offering PMI always charge for their services. Please click here to be referred to a competent mortgage broker. Mike will also be pleased to help you with any of your real estate needs. Please click here to go to Realtor Michael Kwiatkowski's contact page.
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