But prior to that, they want to move out of their rented two-bedroom apartment in downtown Manhattan to a house in Westchester County, where they can find more space and better amenities.
After searching for a while, they zeroed down on a beautiful double-storeyed villa—but it was out of their budget. Thinking about the future, they decided to go overboard and contacted a bank for a loan. Upon assessing their credit report and income statements, Mr. Gael, the bank manager, suggested they go for a mortgage loan and asked how much they were willing to pay as a down payment.
Further, he discussed the period of amortization and the type of interest rate that would best suit Marshal and Lily.
If you’re in Marshal and Lily’s situation and need to understand the different types of mortgages, we at Mares Mortgage have put together a comprehensive guide for you.
Related: A Guide for Avoiding First-Time Home Buyer Mistakes
A mortgage, different from a student or personal loan, is a type of loan taken from a bank or other financial institution to make large purchases—like a home. This property then acts as collateral for the loan.
If the borrower fails to pay back the loan on time, the bank has the right to take possession of the home.
Collateral is a valuable item pledged as security to the bank or lender that will be forfeited if the loan isn’t repaid. The value of the collateral must be equal to or greater than the loan amount.
In a mortgage, the home itself is used as collateral. This often leads to lower interest rates. Other types of collateral could include bank savings, investment accounts, or future paychecks.
When someone applies for a mortgage, they’re expected to pay a portion of the amount upfront. Unlike a student loan, where the full amount may be covered, mortgage loans usually require an initial down payment—often 20%, but it may vary based on credit-worthiness and lender policies.
A credit report provides an overview of a person’s financial habits and loan repayment history to determine their creditworthiness. Scores generally range from 200 to 850, with higher scores increasing the likelihood of loan approval.
An income statement shows income and expenses over a specific period. For individuals, it reflects monthly or yearly earnings and spendings, helping lenders assess financial stability.
Find out about refinancing options with Mares Mortgage.
Amortization is the process of spreading out loan repayments in equal installments over a fixed time period.
This is the percentage charged on the loan’s principal. It’s considered the cost of borrowing. Some rates remain fixed; others may increase over time. If the borrower pays interest on the original amount plus previously accrued interest, that’s known as compound interest.
A fixed-rate interest means the interest rate stays the same throughout the loan term. This is ideal in volatile markets, though in long-term loans (e.g., 30 years), it might be more expensive if market rates drop.
An adjustable (or floating) rate mortgage changes based on market conditions. The rate is usually the sum of a market index and a fixed percentage from the lender. The rate stays fixed initially, then adjusts periodically.
An interest-only mortgage allows lower payments early on—usually covering only interest. After that period, payments increase. This is typically a short-term mortgage (up to 10 years), best for first-time buyers.
A balloon mortgage is similar to interest-only, but ends with a large lump sum. It can be risky and is ideal for those expecting a major income boost soon.
Related: Reasons to Refinance Your Home
Every buyer has different needs, so lenders offer a range of mortgage types.
A reverse mortgage is for homeowners aged 60+, allowing them to receive payments based on their home equity. No repayment is required until the borrower passes away or sells the house. However, it can become expensive over time and has risks for surviving spouses.
Backed by the Federal Housing Administration, these loans require low down payments (as little as 3.5%) but often include additional mortgage insurance fees.
Offered by the Department of Veteran Affairs, these loans are for military personnel and their families. They require no down payment and are backed by the government.
Designed for rural buyers, USDA loans are supported by the USDA and Rural Housing Service to help lower-income individuals buy homes.
These are not backed by any government entity. They are typically fixed in terms and interest rate. Most are supported by Fannie Mae or Freddie Mac.
Jumbo loans exceed $765,600. While interest rates may be lower, stricter qualifications (low debt-to-income ratios, high reserves) apply.
These loans don’t meet standard government guidelines. They allow alternative income proof (e.g., bank statements) and can work for lower credit scores, high DTI ratios, or unique properties.
A mortgage broker is a professional who connects borrowers with lenders. They aren’t tied to any single bank and help buyers find the most suitable financing options.
If you want to get started understanding loan options for your mortgage, contact Mares Mortgage to find out more.
Related: Questions to Ask a Mortgage Lender
