Types Of Mortgage Loans
The mortgage remains the primary form of lending when it comes to property transactions. The process entails granting money used in obtaining a home with the assurance that debtors will repay the loan with interest.
The idea of mortgage has its roots in ancient civilization. It started when scholars began hypnotizing that debtors swore a pledge to obtain property before the advent of the mortgage. One of the earliest accounts of mortgage laws sterns from ancient India is the Code of Maau, which is an ancient Hindu script that rejects deceptive and fraudulent mortgage properties.
According to the American Law Register, the origin of mortgages’ history lies in the sacred Talmudic Scriptures. The Ancient Greeks and Roman civilizations simply borrowed these concepts from Judaic sources.
The Romans also adopted the concept of debt security by assigning the possession of the property to the creditor while the debtor remains in control of it while the debt is repaid.
What then is a mortgage? According to Investopedia, a mortgage is a loan a borrower uses to purchase or maintain a home or other form of real estate (link other forms of real estate) and agrees to pay back over time. The payment is usually done in regular instalments. The property serves as collateral. Mortgage loan (mortgage) is derived from a Law French term used in Britain in the Middle Ages which means “death plague” and refers to the pledge(s) ending when either the obligation or agreement is fulfilled or the property in view is taken through foreclosure.
What Are the Types of Mortgage?
There are different types of mortgage loans for different purposes. Some are for first time home buyers and some are for veterans. In this next phase, we take a detailed look at the various types of mortgage loans.
- VA Mortgage: This loan was established in 1944 by the United States government and is used in assisting returning service members purchasing homes without them needing a down payment or an excellent credit.
There are few types of VA loans:
i. VA Energy Efficient Mortgage- which allows veterans to borrow money (about $6000) for home improvements. The money covers heat pumps, storm or thermal windows, solar installations or systems. However, there are certain options homeowners can’t purchase with the money like appliances, non-permanent additions and air conditioning units.
ii. VA IRRRL Mortgage- Stands for VA Interest Rate Reduction Refinance Loan is known as a VA streamline because it’s a simple, low-cost refinance loan.
How does it work, you may ask? An IRRRL doesn’t require a typical VA lender or an underwriting process. It is used to refinance your current or old VA loan into a lower rate, a lower payment or both. The VA streamline loan program is very popular because it's easy to use.
iii. VA Purchase Loan- Requires a $0 down payment and is used by service members and veterans in purchasing existing or new homes. The loan allows them to purchase homes such as condominiums, single-family homes, manufactured homes or new construction.
iv. VA Cash-out Mortgage- This type of loan is open to veterans with and without current VA loans. With this mode, qualified homeowners can refinance their mortgage and take out cash from their home equity; they can also refinance up to 90% of their home’s value.
2. Fixed-rate mortgage: In this scenario, the mortgage is paid off over time and at a fixed rate of interest regardless of trends and changes that affect rates of interest. In this case, homebuyers have a variety of loans to choose from ranging over 10, 15, 20 or 30 years. This makes budgeting easier for homeowners.
The main advantage is that the borrower is protected from the sudden significant increase in monthly mortgage payments; its downside is that payments are less affordable when the interest rates are high which makes qualifying for a loan more difficult. The 30-year mortgage is very popular because it offers the lowest monthly payment.
3. FHA Mortgage: This is insured by the Federal Housing Administration and issued by an FHA approved lender. It's designed for borrowers with low to moderate-income or low credit scores. It serves as a good choice for first time home buyers who want to take advantage of juicy incentives like low or no down payments and lowered or no credit score requirements.
4. Conventional fixed-rate mortgage: Also known as conforming mortgage which conforms to established guidelines for the size of the loan and the borrower’s financial situation.
This type of loan features lower loans than VA, FHA or Jumbo loans.
5. Jumbo loans: these loans are used in financing properties that are higher than the conforming loan limit set by Federal Housing Finance Agency. This standard was put together by Freddie Mac (FHLMC) and Fannie Mae (FNMA); two government-sponsored enterprises that set the limit on the maximum value of any individual mortgage.
In 2020, the conforming loan limit was $510,400 and for 2021 it's $548,250.
We’ve talked about the origin of mortgages and their types. Got any questions or suggestions? I’ll be in the comment section.
