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Motgage loanWhat is a Mortgage?
A mortgage called a deed of trust in some states is a legal document that pledges property as security for the repayment of the loan. If the borrower does not comply with the loan repayment terms the mortgage gives the lender the right to take ownership of the property and then sell the property in order to satisfy the debt.
The basic contents of a mortgage instrument are
? Names of the mortgagor and mortgagee
Mortgage History
History of American mortgage industry lets us know that the mortgages were originated primarily by banks who lent funds acquired through customer deposits. Early US mortgage required 50% or more as down payment or property equity. The typical mortgage term was 5 yrs or less with the remaining balance due and payable at the end of the term either with the homeowner cash or a refinance mortgage. These terms left home ownership out of reach for many Americans which changed in the later years and became feasible for every American to own his home. It was after the great depression in the year 1929 where thousands of home owners lost their homes to foreclosure due to lack of personal cash to pay off their debts and no lender to refinance. Widespread poverty and many Americans were left homeless. It was in 1933 president Franklin D Roosevelt, during his election campaign promised a new deal for the Americans. He enacted reforms that revolutionized the mortgage loan industry and once again made home ownership available to the average American. His administration created FHA which developed 30yr low down payment fully amortized fixed rate loan program .
Mortgage Loan Process
The simplified mortgage loan process is that the prospective homeowner/ borrower who is seeking a loan from the lender to purchase a new home or refinance an existing mortgage goes to the mortgage lender who originates, processes, funds and closes the loan who then sells it to the secondary market investor . The secondary market investor purchases the loan from the mortgage lender, pools the loans and sells to other investors.
A secured mortgage loans use three basic instruments to create a loan a) Proof of ownership- Document proving the borrower owns the collateral . b) Note- Promissory note which states the terms and conditions of the loan. It will show interest rate, the date of the loan, the amount of each payment and dates when the payments are due . c) Security Document- A document to show that the lender has some interest in the property.
Types of loan programs There are different types of loan programs.
1) Government Loans / Non Conventional Loans are loans which are backed by the US government which consists of the a) FHA Loans- Insured by the FHA, it offers lower down payment and are easier to qualify for, than the typical conventional loan . b) VA Loans ? Guaranteed by VA, available to veterans, usually no down payment. c) RHS Loans ? Rural Home Loan, also known as Farmers Home loan are guaranteed by the Rural Housing Service of the US Department of agriculture ."> These provide mortgage financing on rural properties and offer reduced closing costs and no down payment .
2) Conventional Loans are loans which are not guaranteed by the government entity and lenders do not have any assurance of repayment."> They require PMI to mitigate the risk to investors for loans that represent greater than 80% of the value of the mortgaged property .
3) Conforming loans are mortgages that meet the requirements of FNMA, FHLMC or GNMA .
4) Non ? Conforming Loans are those that do not meet the requirements of FNMA, FHLMC or GNMA. They are also considered so when the loan amounts are in excess of FNMA/FHLMC limits, which are commonly referred to jumbo loans.
5) Prime Loans are loans made to borrowers with acceptable credit and adequate income and are secured by structurally and readily marketable collateral . Prime loans are commonly referred to as ?A? loans.
6) Sub-Prime Loans are those which are provided to borrowers with significant credit blemishes (recent bankruptcy, foreclosure, etc ?)
The interest rate of a mortgage loan could be a Fixed Rate Mortgage or Adjustable Rate Mortgage. In Fixed rate mortgages the interest rate and resulting principal and interest payment remain constant throughout the life of the loan. In Adjustable rate mortgages the interest rate changes as per the index. There are different types of Adjustable rate mortgages; one of them is Convertible Arm which allows conversion to a fixed interest rate at a later date.
The mortgage loan can be amortized as a) Fully Amortizing Mortgages? It requires regular monthly payment of Principal and Interest. It causes the loan balance to be paid in full by maturity date, b) Balloon Mortgages. It requires monthly payments of principal and Interest. It requires lump sum repayment of the remaining loan balance at a predetermined date as specified in the loan documents, c) Negatively Amortizing Mortgages ? It occurs when the borrower's payment is insufficient to pay the accrued monthly interest on the mortgage and there is no monthly reduction of the principal balance. The unpaid monthly interest is added to the loan balance resulting in an escalating rather than de-escalating loan balance, d) Interest Only Mortgages It provides the benefit of a reduced monthly payment without the detriment of negative amortization. The borrower's payment is equal to the amount of monthly accrued interest and does not include any payment of principal, e) Graduated Payment Mortgage it requires a borrower to make larger monthly payments over the term of the loan. It is unusually low for the first few years but gradually rises until year three or five and then remains fixed, and f) Simple Interest Mortgage ? It?s a mortgage on which interest is calculated daily based on the balance at the time of the last payment. The daily interest is thus the same during the period between payments.
When a borrower requires a mortgage loan against collateral he chooses the amortization type and interest rate as he wanted by choosing among the mortgage companies that provide the best rate for the collateral.
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