A mortgage is a type of loan used to purchase real estate. The loan is secured with the purchased property as collateral. Mortgages are often larger loans that are repaid in predetermined payments over a set period, including interest.
Related: What is a Mortgage? Types of Mortgages and How They Work
Who Can Get a Mortgage?
Mortgage loans are available to both individuals and businesses. They are used to buy property with debt that is repaid over the term of the loan.
Individuals may use mortgages to purchase a primary residence, which is the most common use for mortgages in the United States. However, a buyer may also choose to apply for a mortgage to purchase an additional home or an investment property. Individual buyers are generally required to pay a certain amount of the property’s purchase price upfront, known as the down payment, and must demonstrate their ability to repay the mortgage over time.
Businesses are eligible to apply for mortgages for properties of all types. Often, a business will take out a mortgage to purchase a property used for business operations. For large commercial property loans, businesses must show evidence of their financial stability and must demonstrate that the property being purchased will become a viable source of income.
There are few limitations on what an individual or business can do with a mortgage loan, or what properties they may purchase, as long as they can demonstrate their ability to repay the loan.
How is a Mortgage Different from Other Types of Loans?
Mortgages are different from other types of loans because they are taken out against a specific purchase with that asset acting as collateral for the full amount of the loan.
If a borrower cannot repay their mortgage, the property may be foreclosed on by the bank. Foreclosure is the process of a bank or lender repossessing a property. The lender then sells the property, and the proceeds from the sale are used to pay off the outstanding balance. The lender is also allowed to keep funds from the proceeds to pay the costs associated with the foreclosure and the sale, then any remaining proceeds are paid to the borrower.
Types of Mortgages: Fixed-Rate and Adjustable-Rate
Depending on the amount of money being borrowed, the situation of the borrower, and the available terms of the loan, borrowers may often choose between a fixed-rate mortgage or an adjustable-rate mortgage. The variation between these two types of mortgages relates to the interest owned rather than the length of the mortgage.
Some mortgages may be as short as five years or less, while others can be 30 years or longer. The most common lengths for mortgages are 30 years and 15 years. These longer-term mortgages allow borrowers to pay a lower monthly payment, but the total interest paid over the term of the loan is higher than for a shorter-term loan.
Fixed-Rate Mortgage
A fixed-rate mortgage, also known as a traditional mortgage, is the most common type of mortgage for individual borrowers.
With a fixed-rate mortgage, borrowers lock in the interest rate from the beginning. When a loan is taken out with a fixed rate, borrowers know what they will pay throughout the lifetime of the loan. The mortgage interest rate will never change.
Borrowers may choose to refinance their fixed-rate mortgage in the future if interest rates drop, to take advantage of lower interest rates.
Adjustable-Rate Mortgage
An adjustable-rate mortgage has a fixed mortgage rate for a short period at the beginning of the loan, usually around one year. After this initial period, the interest rate will increase or decrease as interest rates change in the future.
Borrowers may end up paying more or less interest for the duration of their mortgage loan. Although the initial rate may be lower than a fixed-rate loan, it could increase to be much higher if interest rates go up significantly. However, borrowers may also pay lower rates throughout their loan period if interest rates go down significantly.
This type of mortgage is usually taken out for 15 years or less. They are higher risk loans that could leave borrowers in the position of being unable to afford the monthly payments if interest rates increase substantially.
Other Mortgage Types
There are several types of mortgages to meet borrowers’ needs. Some of the most common types of mortgages are:
- Conventional mortgage: A mortgage loan that is not insured or guaranteed by the government. Rather, it is backed by private lenders, and its insurance is usually paid by the borrower.
- FHA mortgage: Low down payment mortgages with competitive rates that are backed by the federal government.
- USDA mortgage: Zero down payment mortgages for approved properties that are backed by the federal government.
- VA loan: Loans for eligible veterans, active-duty personnel, and surviving spouses, with competitive rates and a low or no down payment that is backed by the federal government.
- Reverse mortgage: Mortgage that allows homeowners 62 and older to convert equity in their homes to cash.
- Jumbo mortgage: A mortgage that exceeds the limits set by the Federal Housing Finance Agency.
Marimark Mortgage
Marimark Mortgage is based in Tampa, Florida and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.
To get started with a mortgage to buy your next home, please fill out our Quick Mortgage Application, or contact us direct.
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