What You Need to Know About Mortgages

In America, many people dream of owning their own home someday. Because owning a home a big accomplishment, so banks have come up with a type of loan called a mortgage that uses real estate as collateral to secure this type of loan.

The most common type of mortgage is a home mortgage. You can apply for a mortgage through most financial institutions – banks, credit unions, etc. Or today there are financial companies that market themselves specifically as mortgage lenders.

Choosing your financial institution is actually the first step in applying for a home loan. It’s best to shop around because different institutions may offer varying rates on mortgage loans. The next step to applying for a home loan is to look at your credit report. Your credit report is the main piece of information that will determine if you are approved for a mortgage and how low you can get your interest rate. If there are any negative attributes on your credit report, it may be best to try and rectify those before securing a home loan.

When applying for a mortgage, you’ll also need to know how much of a down payment you can afford. This will also help determine your approval and what interest rate your mortgage loan will carry. The standard amount of a down payment on a mortgage is 20 percent. The more money you are able to put down, the more likely you are to be approved and receive a lower interest rate. If you are not able to put 20 percent down on the home loan, you can still be approved, but you may have to pay an extra fee each month as mortgage insurance.

You can also choose what type of interest loan you would prefer. The most common types are the fixed rate loan and the adjustable rate loan. With a fixed rate you receive an interest rate that stays the same for the life of the loan. Mortgages can be set up for anywhere from 10 to 50 years. Though the most common timeframe today is the 30 year mortgage. This allows for lower monthly payments without having to pay too much interest – as you might on a 50 year mortgage.

If interest rates are too high, you may choose to have an adjustable rate mortgage (ARM). This type of loan typically allows you to receive a lower interest rate initially, but fluctuates over the life of the loan. If interest rates fall, the interest on your loan will fall. But if interest rates rise, you’ll pay more interest. However, there is typically a cap on how high your interest rate can go or how high your monthly payment can be raised due to the interest.

There are also different types of mortgage loans. The three most common are the FHA loan, the VA loan and the RHS loan. FHA loans are backed by the Federal Housing Administration. This means that they insure the lender that you will pay back your loan. This way, you are able to buy the home with a lower down payment and your credit score does not matter as much. Though, many times as part of your monthly mortgage payment, you may have to pay an insurance fee if you do not make a 20 percent down payment on your loan.

VA loans backed by the US Department of Veteran Affairs allows veterans to take on a mortgage with little or no down payment and lower interest rates. The office of Veteran Affairs does not lend money but guarantees the loan to the financial institution that does offer the mortgage to the veteran.

The third common type of loan is the RHS mortgage. This loan is guaranteed by the Rural Housing Service for those who live in rural areas. This type of mortgage helps families in the agricultural business obtain mortgages with little or no down payment.