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Loan and Mortgages

 

Loans and Mortgages

Loan is defined as the sum of money, which is borrowed at a particular interest rate. It may be acknowledged by a bond or a promissory note. There are other types of loans such as mortgages, bonds and lines of credit. Mortgage is used to purchase property or housing. If the borrower does not pay the loan, the bank has the right to repossess the property and sell it to get their money back.

Loan

Loan is a type of debt. The borrower receives as an amt of money from the lender and this money will be paid back in regular installments together with the interest to the lender. If the granting of loans is abused then it is said to be predatory lending.

Classification of Loans

Call loan or demand loan - Payable on demand at any time.

Time loan - It has to be paid within a specified time.

Interest only loan - There will be specific repayment schedule and interest rate for a specific amount and will be mature between 1 and 10 year

Different Types of Loans

There are different types of loans products with varying fees, features, and interest rates.

Installment Loan

The full amount will be borrowed at one time and will be repaid in installments on a regular basis over a certain time period.

Line of Credit

A check is be written for the amount to be borrowed, up to a limit set by lender .Thereafter the interest for the amount should be paid and this could be borrowed again.

Secured Loan

The savings or property should be put as collateral to guarantee the repayment, for example, car and home equity loans

Unsecured Loan

Higher interest rates will be issued for these types of loans since it is given based on trust. There is no collateral for unsecured loans

Fixed Rate Loan

It is given when the interest rate and monthly payments are the same for the loan which is issued.

Adjustable Rate Loan

The interest rates for these loans will be varying. It is more flexible and can make additional payments without penalty

Introductory Loan

In this case the interest rate is low. The rates can be fixed or varying. The principal amount can be reduced if payments are made at introductory stage.

Low doc loan

This is given for investors or self employed people. They need not submit any tax returns or payment reports. However it will be having higher interest rates.

Mortgage

It is a tool for shielding lender by giving him an interest in asset of the borrower. Real estate transactions are done through mortgage. The person who borrows the money and gives mortgage is the mortgagor and the one who is paying the money is mortgagee. The mortgage must be executed based on certain formalities from the state government. It must include details of real estate and should be signed by all owners. In order to secure the repayment of debt, the buyer transfers a legal document and this is said to be mortgage note. After the settlement of balance due the mortgage is termed as discharged and is recorded in the register. The mortgage note comprises of amount of the debt, amount due date, rate of interest, monthly payments etc. If the mortgagor does not pay the debt then the mortgagee could ask for a court order sale of the property and the debt is paid out of the proceeds.

Different Types of Mortgage Plans

Government loans

.Federal Housing Administration (FHA) loans

It has low down payments and is easier to get FHA loans. It cannot exceed the statutory limit.

Veteran Affairs (VA) loans

This loan is provided for veterans and service person to obtain home loans with fewer down payments. It is guaranteed by U.S. dept of Veterans Affairs. Initially they determine the person's ability and then only will they issue the certificate of eligibility, which can be used in applying for a VA loan.

Rural housing service (RHS) loans

It guarantees loans for rural residents with minimal closing costs. There will be no down payment.

Conventional loans

Conventional loans can be conforming or non- conforming. Conforming loans have certain terms and conditions. These guidelines will be set by Fannie Mae and Freddie Mac. It includes maximum loan amount, down payment, borrower credit and income requirements... these are the classifications if Conventional loans.

Fixed rate mortgages

The interest rate will be the same for the life of loan. It is easier to plan and budget for. It is common in 30 and 15 year terms.

Adjustable rate mortgages (ARM)

The interest rate and monthly payments are varying in these types of loans. This is because the interest rate is based on an index, which can either rise or fall. However, there is a limit for this rise and it will be not more than 2 percent a year.

Hybrid loans

It has features of both fixed and adjustable rate mortgages. Initially it will start with a
fixed rate for certain amt and later will change to adjustable rate. The interest rate will be lower in the initial state.

Balloon payments

The final payment for this loan will be a huge amount. These payments will be based on a 30 year basis. This is beneficial only to homeowners who stay for a short period of time.

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