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Home Mortgage Summary

The general subject of home mortgages can be daunting and complex to many people. However, there is no mystery or ambiguity to how they work. Rather, they are pretty simple to render and perceive once the basics are known. This report shall cover basic mortgages, Federal Housing Administration (FHA) mortgages, adjustable rate mortgages (ARM's) as well some general advice and items to consider. Mortgages should not be (and cannot be) entered casually in light of the financial implications and the recent history surrounding the industry. However, mortgages are the single largest way to create wealth for most Americans.

Home Mortgages

Even with the recent upheaval and problems relating to the mortgage industry, the basic structure and formulations that lead to mortgages being created has not changed. There has simply been a reform of who gets mortgages and what hoops they have to jump through to get said mortgages. Even after the changes, the three main types of mortgages are conventional, Federal Housing Administration (FHA) loans, and adjustable rate mortgages (ARM's). They all work similarly but there are noticeable differences from one to the other. This report will explain how they all work and there will also be a quick listing of other factors that should be taken into account.

Conventional Mortgages

The main type of mortgage is the conventional loan. The required down payment varies based on a number of factors. Those factors include whether the home is a primary residence or if it's an investment or otherwise secondary property such as a second home, a vacation home or something of that nature. Typically, the down payment for a primary residence can be as low as five percent. The required down payment becomes a lot higher if the property is for investment or secondary use. Typically, the down payment for a non-primary residence would have to be at least twenty percent. All of the percentages above are based on the appraised value of the house. The loan that one can get is typically tied to the value given by the appraisal. For example, if a home is valued at $100,000, the required down payment would be no less than $5,000 (five percent) and the bank would lend no more than $95,000 (95%) for that house. The percentages will be different for other loan types and house purchasing situations, but those are the basic rules. For example, a bank will probably want at least $20,000 down for an investment property (20%) but the bank might ask for more based on the market in question, the person requesting the loan and their credit history and so forth. As long as the down payment and income is there, there is no real limit on the size of a conventional mortgage. Loan terms are almost always fifteen or thirty years and the loan interest rate is usually fixed. Those that do fifteen year loans get a higher payment but also usually get a lower interest rate (Bank Rate, 2015).

Speaking of interest rates, they have varied a lot over the years and in the last decade or so in particular. Per Daily Wealth, the mortgage rate jumped up and down between four and six percent between 1900 and the late 1960's. After that, it shot all the way up to north of sixteen percent in the early 1980's. Since then, it has literally dropped into the basement as it less than four percent right now. There have been spikes up along the way but the trend has been sharply down since the 1982-ish peak. At the same time, the average home price has shot up and this accounts for inflation. The price was back and forth around $80,000 from 1920 to 1940 but it then bottomed out in the mid-1940's during the height and end of World War II. It has since gone up steadily with some drops in the overall growth here and there but the price of homes has gone steadily up. Unlike the mortgage interest rate graph, the was not a 1980-esque drop like there was with interest rates. There was a slight drop in the early 1990's and then another one in the last five years or so. In the case of 1990, there was a recovery but it remains to be seen what precisely will happen now that the Great Recession is over. However, rates have gone down a lot more than home prices have gone up (Daily Wealth, 2011).

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Federal Housing Administration (FHA) Loans

The next major type of loan is done by the Federal Housing Administration. At this time, the minimum required payment is 3.5%. It was three percent before the housing crash of 2008-2010. However, the rate was raised just a bit so as to make the standards a little tighter. However, the reduced down payment of the FHA loan program as well as a break on the typical penalties for doing such a small down payment relative to the value of the house make this an attractive option for many first-time buyers. That being said, the costs of executing and creating the mortgage can be a little higher (but sometimes less) than a conventional mortgage. However, it depends on the circumstances. Lastly, the highest purchase price allowed for FHA loans is either $271,050 (for lower-cost markets) or $625,500 (for higher-cost markets). Examples of the higher-cost markets include parts of California, Washington DC and New York City. These amounts are adjusted every year based on inflation and cost of living. Like conventional mortgages, the interest rate on these loans is fixed and stays the same for the life of the loan. Also like conventional mortgages, the term of the loan is usually fifteen or thirty years, the rate is usually fixed and the interest rate varies based on the term of the loan (FHA, 2015).

Adjustable Rate Mortgages

The last major type of home mortgage loan is adjustable rate mortgage. As the name suggests, these are loans where the rate is not fixed. At fixed points, usually once a year, the interest rate of the loan jumps up or down based on the interest rates set by the Federal Reserve. When one hears about references to payments shooting up to a point where they could not be afforded during the recent Great Recession, these are typically the loans that those people were talking about. Interest rates have since collapsed and were in the basement from 2010 to 2014. They are just now starting to edge up a bit. Regardless, adjustable rate mortgages can be attractive if the prevailing interest rates are low. However, the payment will shoot up if the interest rate shoots up and home buyers using this mortgage type need to be aware of this. Typically, there is a several year period where the rate stays fixed. However, it is adjustable thereafter and typically this lasts for the life of the loan (Bank Rate, 2015).

Other Considerations

In addition to the qualifications above, there are a few other odds and ends that need to be discussed. First, there are also loans known as "interest only) loans where the person borrowing the money only pays the interest and nothing else. This leads to the principal amount owed being flat but can be useful if a person wants to own and control a property but not actually have to pay down against the principal. Also, there are fairly consistent income and debt guidelines that people must adhere to when requesting a loan. A common set of ratios used is the 31/43 ratio. This references that a borrower's prospective house can be no more than 31% of their income and their total debt (including said house payment) can be no more than forty-three percent of their income. For people with poorer credit or with certain high-risk lenders, those percentages might be lower. For the more affluent and well-off, those ratios can be much higher with the overall debt percentage number being as high as fifty percent (Consumer Finance, 2015).

However, prospective home buyers need to bear in mind that the home market crash was brought on by a number of factors. The lenders, buyers and lax government oversight that led to the crash have been corrected. Some say there has been an over-correction. Lenders are typically much more careful about who they lend to and when. The amount of paperwork and hoop-jumping required to get a loan is often much higher nowadays than it used to be. Regardless of what a given lender does, typical proofs and requirements include proof of income, proof of taxes paid, proof of good credit history and so forth. Credit history could include a review of whether there are missed payments, bankruptcies, charge-offs, too much debt, too little debt/credit history and so on (HLLC, 2015).

People that seek to buy a house need to keep several things in mind before taking the.....

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