If you’re a mortgage loan officer or mortgage broker, making sure that your clients have access to high-grade information on the various home loan products on the market is essential.

We’ve put together a straightforward guide to the types of mortgage loans currently available, providing you and your clients with the information necessary for good financial decision-making.

In this guide, we cover options such as mortgage refinance, fixed and adjustable-rate mortgages, government-insured mortgages, interest-only products, excess (jumbo) mortgages, and more.

What is Mortgage Refinance?

Mortgage refinancing involves taking out an additional loan to pay off the balance of a current mortgage.

Mortgage refinance options may be appropriate for several reasons, including:

  • The chance to borrow at a lower interest rate than the pre-existing mortgage.

  • The opportunity to spread repayments over a longer period.

  • The possibility to reduce monthly repayment amounts.

Most mortgage products are suitable for refinancing, including a fixed-rate mortgage, VA refinance, and adjustable-rate products.

Down Payment

Before taking out a mortgage, most lenders will require the applicant to have saved a down payment. For mortgages backed by Freddie Mac or Fannie Mae (the two government-backed organizations that buy and guarantee most mortgages sold by lenders), a minimum of a 3% down payment is needed.

The percentage deposit is based on the value of the loan required. For example, if you wish to borrow $150,000 for a property, you will need a down payment of (as a minimum) $4,500.

Note that for down payments of less than 20%, mortgage holders may be required to take out private mortgage insurance.

In some circumstances, particularly for refinancing, borrowers can use collateral such as the equity in their home instead of a down payment.

Repayment Mortgages

A repayment mortgage is what many people might refer to as a “traditional” mortgage. Repayments consist of a number of monthly installments, each of which includes a percentage of the interest on the loan, along with a percentage of the “principal” of the loan. The principal in a loan context is the initial value of the loan.

There are several different types of repayment mortgage, including fixed-rate products, and adjustable-rate mortgages.

Adjustable-rate mortgage

An adjustable-rate mortgage initially usually has a constant rate of interest. The fixed (constant) rate of interest may last for up to five years. It’s uncommon to find an adjustable-rate mortgage that’s fixed for longer than five years. After the fixed interest rate is up, the interest rate begins to fluctuate, depending on factors such as the base rate and other economic variables.

Fixed-rate mortgage

A fixed-rate mortgage is taken out at a specific rate of interest, which remains constant for the duration of the loan. 

Whether an adjustable-rate or a fixed-rate mortgage is going to be best depends on the individual product, as well as an applicant’s circumstances, attitude to risk, and the predicted value of the base rate. 

Government Insured Mortgages

Government-insured mortgages may be available to some borrowers. Typically, applicants for a government-insured mortgage don’t need to have the impeccable financial credentials required for a conventional mortgage. Eligible low- and middle-income earners, as well as those who may not have a high credit score, can often take advantage of a government-insured mortgage. 

There are three main types of government-insured mortgage: FHA (Federal Housing Administration), VA (Veteran Affairs), and USDA (United States Department of Agriculture).

FHA

Available to people who can’t access a conventional mortgage (usually due to issues such as a sub-prime credit rating, or fluctuating income) an FHA-backed loan requires a deposit of 3.5%. Only FHA-approved lenders are able to sell an FHA-backed loan. Note that it is the lender that lends, no the FHA.

FHA loans require borrowers to pay mortgage insurance – the mortgage insurance premium.

VA

VA mortgage is available to eligible serving personnel, veterans and/or their spouses. VA mortgages don’t require a deposit and tend to have a low rate of interest. There is also no need to pay a mortgage insurance premium or take out any other form of mortgage insurance.

For eligible individuals, a VA loan is often the best option.

USDA

USDA mortgages are available to eligible low-income earners in rural areas. The exact eligibility requirements vary depending on location. In general, a USDA mortgage is offered at a competitive rate of interest and requires a small (or no) down payment (or deposit).

Specialist Mortgages

Jumbo Mortgages

jumbo mortgage is one that’s for a sum larger than that normally permitted for a conventional mortgage. A jumbo mortgage can’t be backed, guaranteed or authorized by Freddie Mac or Fannie Mae. As a result, borrowers wanting a jumbo mortgage need to show lenders they are a reasonable risk.

Jumbo mortgage applicants may need to:

  • Have a large down payment available.
  • Have a significant amount of collateral (such as property equity).
  • Have a very high credit score.

Interest Only Mortgages

These are mortgages where repayments are only made on the interest accruing to the loan, not the principal. Borrowers taking out an interest-only mortgage are expected to pay off the principal in full at the end of the borrowing term, if not before.

Interest-only mortgages can work for people who receive bonuses or other one-off cash sums periodically, which can be used to bring down the principal balance. Some interest-only borrowers may sell off some of their portfolios to pay off the principal balance.

Reverse Mortgages

Seniors who want to have an income to fund their retirement may consider a reverse mortgage. A reverse mortgage involves taking out a loan against the value of the property. The mortgage company will then recoup the loan value when the property is sold.

Remember that you may need to pay interest if you take out a reverse mortgage. 

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