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  Type of Mortgages

What is a Mortgage? A mortgage is a method of using property as security for the payment of a debt. Even though the term mortgage formally refers to the legal device used in securing the property, the term is commonly used to refer to the debt secured by the mortgage.

In most jurisdictions, mortgages are strongly associated with loans secured on real estate rather than on any other property (such as cars, ships, gold..etc) and in some cases only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals or businesses can purchase residential or commercial real estate without the need to pay the full value immediately.

Conventional Mortgages: There are numerous types of conventional mortgages like assumed mortgages, commercial loans, equity loans, second mortgage, reverse mortgages, seasoned mortgages, participation mortgages and many other available. However, the most basic types of conventional mortgages are:

  • Fixed rate mortgage

  • Adjustable rate mortgage (ARM)
Fixed rate mortgage:
In a fixed rate mortgage, the interest rate, and in variably monthly installments that has to be re paid, remains fixed quite often for the entire life time (or in some cases for the term period) of the loan. The term is usually for ten, fifteen, twenty, thirty or even forty years. The only increase a consumer (or the debtor) might see in their monthly repayments would result from an increase in their property taxes or insurance rates (if they have opted to use an escrow, paid using an escrow account). But the repayments for principal and interest will be consistent through out the life of the loan using a fixed rate mortgage.

Adjustable rate mortgage (ARM):
In an adjustable rate mortgage, the interest rate is fixed for a period of time (but, some times the interest rate can be fixed for the entire life time of the loan), after which it will periodically (normally, it happens annually or monthly) adjusted according to some market index. Common ARMs used in the USA, include the Treasury Index (T-Bill), the Prime Rate, and the London Interbank Offered Rate (LIBOR). Some other indexes which are also available in the market include Cost of Funds Index, COFI, and MTA.

Jumbo Loans:
Apart from all these different types of available conventional loans in the market; jumbo loans, a unique concept for borrowing is increasingly gaining importance lately. Especially with the huge rise in the prices of the homes, conventional loans are finding it difficult to raise the required amount of funds to buy a new house. Here is the concept of jumbo loans comes to help customers looking for extra financing.

Traditional mortgage lenders do not typically loan more than $417,000 in 2006 for a single family mortgage loan. For those who need heavy financing, jumbo loan lenders are there to provide it. Large investors, such as insurance companies and banks, often step in to fill the need for additional financing with maximum mortgage amounts going to the $1 million or $2 million range.

Fannie Mae and Freddie Mac, two large agencies that purchase the bulk of residential mortgages in the United States, establish the limits for the jumbo loans. This limit signifies the maximum dollar amount that they will purchase from an individual lender. Those who need a first mortgage above the limit must look beyond the traditional lending market and search for lenders who offer jumbo mortgage loans.

The average interest rates for jumbo loans are typically greater than conventional conforming mortgages, and vary depending on property types and mortgage amount. Hence whether to go for jumbo loans or not is basically a question of whether you actually require huge amounts even at a bit higher rate or not.

As already stated jumbo mortgage interest rates are higher than the rates for conventional mortgages, hence it is very important to find a good lender once you decided to go for the jumbo mortgage. The good news is, the mortgage lending market for jumbo mortgages is enough competitive. Many lenders both online and offline offer this form of financing, which will enable you to make comparisons easily.

If you are still confused in choosing the right mortgage to fulfill your needs, the world wide web provides you with a rich information and answers to all your un answered questions. Browse through the web and find the required additional information. The article is for information use only. Each state may have different rule and regulation.
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