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Types of Mortgage Loans in United States

Types of Mortgage Loans

What is a Mortgage?

Mortgage as a legal concept is a type of pledge of real estate. At the same time, the real estate object itself remains at the disposal of the debtor, provided that the latter fulfills the obligations. Otherwise, the property goes to the lender. Thus, the mortgage protects the interests of both parties.

But in ordinary life, we are used to calling a mortgage a type of loan that is issued to purchase a house. Such a loan is issued at a certain percentage for several years.

Important! The owner does not have the right to dispose of property (give away, re-register) until the mortgage loan is fully paid off.

What is the Difference between a Mortgage and Other Types of Loan?

The specifics of a mortgage is that this type of loan is targeted. Mortgages are extended so that the money can be used to buy an apartment or a house. In this case, the bank acting as a lender must approve the purchased property.

Its payout period also differs. Unlike a loan that is issued for an average of 5 years, the mortgage loan repayment period can be 30 years.

Reference. There are different types of mortgages depending on the status of a borrower. For example, in the USA, special conditions are provided for war veterans (VA loan), for those who purchase housing for the first time (FHA loan). There are also special programs for pensioners, for disaster victims and even for those who are ready to use energy-saving devices in the purchased housing.

Mortgage interest can be paid at a fixed (FRM) or adjustable (ARM) rate.

Important! Variable or adjustable rate changes depending on the market situation. Accordingly, the mortgage payment amount may decrease or increase during certain periods.

What is the Annual Percentage Rate (APR)?

The term “percentage rate” means the amount of profit in percentage terms that the lender receives from the borrower as payment for the loan taken.

The annual percentage rate (APR) most accurately determines the amount of overpayment and takes into account all administrative and other expenses. This is the total cost that is paid for the use of credit funds during the calendar year.

Types of Mortgage Rates

There are several types of loans in the U.S. mortgage market. Let’s consider the main ones.

Fixed-Rate Mortgage (FRM)

This is the most common type of loan, as it is considered less risky. When entering into a loan agreement, the interest rate is set forth and it does not change during the entire period. The borrower does not depend on the fluctuations of the economy and can calculate the expenses in advance.

Important! But also in the opposite situation, if the market rate indicator decreases, the borrower may not claim a decrease in payments.

Adjustable-Rate Mortgage (ARM)

This type of transaction is subject to market fluctuations. The attractiveness of such a loan is that adjustable rates are usually lower than fixed ones. But it is much more difficult to understand it. This option provides for an initial period, during which the rate cannot be changed.

At the end of the period, regular payments will either increase or decrease, in accordance with the reference to certain market indices. In case of ARM, an upper limit is set which the percentage cannot exceed.

Reference. The most common mortgage option in the USA is a 30-year fixed-rate loan.

Types of Mortgage Programs

In the United States, there are two main types of mortgage products: commercial and government.

Commercial loans can be conforming and non-conforming, depending on whether they meet the requirements of standard lending. Non-conforming loans include, for example, large loans (jumbo mortgages).

Government mortgages are those loans that are obtained through government agencies and are insured by the state.

Non-Conforming Mortgage

A jumbo mortgage is a loan that exceeds the appropriate limits. This means that the prices of purchased housing exceed the norms of the federal loan. The standards for mortgage loan limits are set by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation of the United States.

The size of the established limit depends on the state and even the county. Such a loan carries additional risks for lenders, so the interest rate in case of a jumbo mortgage is higher than in other options. There are also increased requirements for documentation.

Reference. The maximum loan amount for buying a single-family home in most states of the USA is about $ 510 thousand.

Mortgage with Government Support

In the USA, there are mortgage programs aimed at supporting certain categories of the population. Such loans are provided by the state with the support of three agencies: Federal Housing Administration (FHA loans) , U.S. Department of Agriculture (USDA loans), and U.S. Department of Veterans Affairs (VA loans).

Important! The requirements for such loans are less strict. These loans insured by the state can be a good help for those who buy property for the first time or for such categories of citizens as war veterans.

Current Mortgage Rates

Today, mortgage interest rates remain consistently below 3 %.

The fixed rate for a period of 15 years is 1.875 %. This is the lowest figure for the last few months.

The fixed rate for a period of 20 years is 2.375 %. This is the lowest figure in recent times.

What Factors Affect the Mortgage Rate?

Indicators that affect the mortgage rate can be divided into two types, depending on whether you can personally influence the change in this factor or not.

External economic factors:

  • features of economic development;
  • inflation rate;
  • issues of employment and unemployment;
  • consumer spending;
  • conditions for housing construction;
  • equity and bond markets;
  • 10-year U.S. Treasury bond yield;
  • the Federal Reserve’s policy.

Personal factors;

  • credit score;
  • credit history;
  • credit term and amount;
  • amount of permanent income;
  • credit security;
  • availability of benefits;
  • property location.

How to Get the Lowest Mortgage Rate?

First of all, you need to pay attention to personal economic factors. A good credit history is the main guarantee of banks' trust.

To choose the most preferential mortgage conditions, you need to pay attention to the analysis and comparison of various offers from borrowers. Subsequently, the time spent can save an amount equivalent to a monthly payment.

Current Mortgage Rates

According to the information from the largest U.S. mortgage lenders:

  1. The benchmark 30-year fixed mortgage rate is 2.920 % with an annual percentage rate of 3.240 %.
  2. The average fixed rate for 15 years is 2.500 % per annum with 3.310 % per annum.
  3. The rate on a 5/1 adjustable-rate mortgage (ARM) is 3.010 % with an annual percentage rate of 4.060 %.

How are Mortgage Rates Formed?

Mortgage rates are affected by economic forces that cannot be influenced: from political cataclysms to the peculiarities of development of the domestic mortgage-backed securities market. Depending on what event occurred, positive or negative, the indicators may decrease or increase.

Lenders analyze and determine their risk levels depending on the market situation. Banks allow for a margin, which should cover the risks as well as all operating expenses in case of a default on a loan. There are certain possible losses and expenses for each individual case.

Important! Accordingly, the lower the risk for a particular lender is, the lower rate will be offered to him/her.

You can influence your credit score, take care of your credit history, and calculate the amount of down payment that is feasible for your budget. Accurate calculations and a serious approach to each factor that you can influence personally will help to increase the chances of getting minimum loan interest.