When people describe the "American Dream," it often includes a variety of things: education, good health, a happy family, money in the bank, and so on. For most people, this vision of the "American Dream" also involves having a place to come home to. Home ownership is sought by those who lack it, and fiercely protected by those who fear losing it. There is something comforting about being able to call a house your own.
Of course, these days it is rare that the house truly belongs to the homeowner. In the current housing market, obtaining a mortgage is almost always a necessity in order to purchase a home. Few people are able to afford the cost of becoming a homeowner up-front. When a mortgage is taken out, the borrower is not actually in debt, but he or she has effectively used his or her new home as a security in place of a traditional loan. As such, when a borrower is unable to make mortgage payments, the result is often foreclosure.
In the current economic climate, foreclosure rates are skyrocketing. Although many malpracticing lenders are partially to blame for this fiasco, in most cases the borrower shares a piece of the responsibility. Several borrowers enter into mortgages that are overly risky. Many of them simply do not understand the requirements of the mortgage they are entering into. Others may recognize the risks, but downplay them. No matter why borrowers enter into mortgages they can't afford, they often find themselves in foreclosure during an economic downturn or after some sort of personal financial crisis. The best way to avoid this situation is to do your homework and obtain a thorough understanding of how different types of mortgages work, and which mortgages will best fit the needs of you and your family.
There are several types of mortgages to choose from. Common mortgage loans include:
All of the options listed above vary greatly. Although this may make learning about the different types of mortgages confusing, the huge differences among mortgage types actually puts savvy borrowers at an advantage. Each type mortgage is made to meet the needs of a different type of borrower, which is why no single mortgage type will work for everyone. As such, there is no type of mortgage that is considered "the best," nor is there a mortgage program that is hated by everyone.
Most people tend to choose either adjustable rate mortgages or fixed rate mortgages. Even these two basic categories of mortgage loans feature a number of variants, depending on the period of time over which the borrower intends to mortgage the house. Traditionally, Americans tend to choose long-term fixed-rate mortgages. However, with people moving far more often these day, more Americans have begun to opt for adjustable rate mortgages. Many end up pursueing an alternative type of mortgage when their financial situation bars them from both fixed rate and adjustable rate mortgages. Unfortunately, it is often the "alternative" mortgages that are associated with malpractice and high foreclosure rates. For this reason, if you are considering an alternative type of mortgage, you need to understand the implications, requirements and every last detail about the type of mortgage you intend to take out.
The Federal Housing Administration has made a variety of FHA mortgage loans available for low to middle income borrowers who do not traditionally qualify for adjustable rate or fixed rate mortgages. There are a variety of FHA loans available to meet the varied needs of borrowers. They include:
The many FHA programs have helped millions of low and middle income Americans become homeowners without breaking the banking. However, the Federal Housing Administration is not without its limitations. Despite claims of these loans being viable options for those facing financial difficulty, oftentimes FHA loans are not available to borrowers with poor credit scores. This is because most lenders have minimum credit requirements for financing.
Another aspect of FHA loans that some view as a disadvantage is the requirement for all FHA borrowers to pay mortgage insurance, no matter the loan type and regardless of how much money is used for a down payment. This mortgage insurance requirement necessitates making both an upfront mortgage insurance payment, as well as monthly premiums.
The drawback that most discourages potential borrowers from seeking FHA loans is the low limit. FHA loans provide much lower amounts of money than other types of loans.
One type of alternative mortgage that many Americans are exploring is known as the jumbo mortgage. Typically jumbo mortgages have higher interest rates since the loan amount is above conventional conforming limits and needs financing by companies which are not directly government backed. Often, borrowers with turn to jumbo mortgages when they are unable to secure other types of mortgages due to bad credit or other financial restrictions.
Borrowers who do not qualify for adjustable rate mortgages or fixed rate mortgages and wish for a higher limit than that of FHA loans often choose jumbo mortgages as an alternative. Jumbo mortgages provide loan amounts that are much higher than the limits typically given for adjustable rate mortgages and fixed rate mortgages. Jumbo loan limits exceed the standard limits set by government-sponsored Fannie Mae and Freddie Mac. Any loan that exceeds the amounts set by Fannie Mae and Freddie Mac fall under the umbrella of jumbo mortgages. To offset the costs incurred by setting higher loan limits, jumbo mortgage lenders typically charge higher interest rates, and are more likely to foreclose on homes.
Jumbo mortgages have a relatively negative reputation in the United States. However, despite general impressions of Americans, there are several distinct advantages to obtaining a jumbo mortgage. The most obvious advantage is that the loan limit is set much higher than the limits of more traditional mortgages. This allows borrowers to mortgage more expensive houses that might not be affordable under a lower loan limit. As a result, jumbo mortgages substancially increase the number of options a potential homeowner can choose from.
Another advantage of jumbo loans is having to only deal with one lending institution. Other types of loans often operate through multiple institutions, such as the FHA and other government bureacracies, as well as private lending institutions. In a misguided effort at avoiding jumbo mortgages, many homeowners take out multiple mortgages from separate lending institutions. This makes refinancing difficult, and often renders it impossible. Working with a single lending institution allows for easy modifying of loans.
As the economy has recovered from the housing crash, the rate spread between jumbo mortgages and conventional home loans has drastically shrunk below historical norms. At some points jumbo loans have even been cheaper than conforming mortgages.