A mortgage is a loan from a bank or other financial institution that helps a borrower purchase a home/property. The collateral for the mortgage is the home/property itself, meaning that if the borrower doesn't make monthly payments to the lender and defaults on the loan, the bank can sell the home/property and recoup its money.   When you take out a mortgage, you make a promise to repay the money that you've borrowed, plus an agreed-upon interest rate.  Your credit score and the market condition at the time, is what usually determines how much your mortgage interest rate will be.  
 

There are different types of home/property mortgages:
 

• Conventional mortgages are loans that are not insured by the federal government (conforming or non-conforming).
   

• Jumbo mortgages are conventional types of loans that have non-conforming loan limits.  This means the home price exceeds federal loan limits. Jumbo loans are common in high cost areas.
   

• Government-insured mortgages are loans that are backed by the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) and the U.S. Department of Veterans Affairs (VA).  They help borrowers not have to make a large down payment.  However, borrowers need to show that they have enough money saved for the down payment and must have at least a 580 FICO score.  FHA mortgages requires you have two mortgage insurances, one paid up front and the other is paid annually for the life of the loan, if you put less than 10% down.  If you put more than 10% down, you can request to have the private mortgage insurance (PMI) removed after making successful monthly payments and have at least 20% equity in the home/property and/or when you have paid down the mortgage to 80% of the home's original appraised value.  When the balance drops to 78%, the mortgage servicer is required to eliminate PMI.

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  Fixed-rate mortgages are loans that keep your interest rate the same for the life of your loan and are usually 15, 20, or 30 years.  These are more stable and recommended, so your monthly payment amount does not increase overtime.

 

• Adjustable-rate mortgages (ARMs) are loans that have fluctuating interest rates that can go up or down depending upon the market conditions.  This is also known as a variable interest rate.

 

Credit unions usually give the best competitive interest rates, so make sure that you compare banks to determine the best interest rate for you.

To learn more about Mortgage Loans, view Khan Academy's YouTube video below:

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By Jason Torrents