What Are The 4 Types of Mortgage Loan Processing? Which One Is Better
Mortgage also known as home loan is a legal document, which when signed by the mortgagor (borrower) conveys the conditional ownership of an asset to the mortgagee (lender). A mortgage loan provides the borrower the chance to pay the full amount of the home brought over a long period of time.
The loan amount to be paid would consist of the principal amount which is the original rate of the asset combined with the interest amount that is determined while sanctioning the loan. Based on the setup of lending and interest rates, mortgage loan processing is divided into 4 major types. They are:
•Fixed Rate Mortgage Loan Processing
This type of mortgage loan processing is fixed as the name suggests. The interest rate and principal amount to be payed is already known by the borrower, and hence gives the advantage of predictability. The payment term can be as short as 15 years or as long as 40 years and more. The disadvantage of this common type of mortgage is that, if the interest rate was very high when the loan was borrowed, then the borrower is stuck with that fixed amount of payment till the payment term ends. Even if the interest rate falls overtime, the borrower must pay the fixed amount.
•Adjustable Rate Mortgage Loan Processing
This type of mortgage loan processing is adjustable according to the changing interest rates. In this type of mortgage, the lender offers a low interest rate at the start of the term, and then the interest rate fluctuates according to the financial index. In this day and age, the interests usually peak. Therefore, the borrowers must be aware and ready to pay the rising payments as the average interests go up. But the advantage of this loan can be reaped by borrowers who do not plan on staying in the home exceeding the initial low interest rate period. They can save money by choosing adjustable rate mortgage since they can refinance before the loan resets.
•Conventional Mortgage Loan Processing
The mortgage loans that are not insured by the federal government are called conventional mortgage loans. These loans consist of two types namely- conforming and non-conforming.
Conforming loans fall within the set payment limits set by government agencies. For a borrower to qualify to take these loans, they need to meet the income restrictions, credit guidelines, property guidelines etc. These loans can be sold to government sponsored enterprises such as Fannie Mae and Freddie Mac. The rules for such mortgage loan companies are set by mortgage investors such as FHFA, FHA, VA, USDA etc.
Non-conforming loans are those that do not fit in the set government guidelines. These have different set of guidelines and cannot be sold to mortgage loan companies such as Fannie Mae and Freddie Mac. Jumbo loans are an example of non-conforming loans.
The advantage of conforming loans is that they have lower interest rate in comparison to non-conforming loans. In case of non-conforming loans, though they are riskier, they enable mortgagors to borrow higher amounts of money than the amount allowed under conforming loans.
•Government Insured Mortgage
Not all the individuals would necessarily have a good credit score or steady employment and income. This is where the government plays a role in encouraging all people, especially the low-income borrowers to own a home. When the mortgagor fails to pay the loan borrowed from a lender, the government backs the lenders losses. There are various types of government backed mortgage which includes FHA loans for those with bad credit score, USDA loans for those with families buying homes in rural areas, VA loans for active duty veterans, Indian home loan guarantee for Native Americans etc.
Which of These Loans Are Better?
The above-mentioned types of mortgages are the common four out of the many types that are available. The loan type which proves to be the most advantageous over time are conventional mortgages. This is because, the borrowing costs tend to be lower than the other type of mortgages even if the interest rates are comparatively higher during mortgage loan processing. This type of loan is ideal for those with a strong credit, stable employment history and income.
However, for those with a weak credit score, government insured mortgages would be ideal though there are limitations to the properties that are eligible for purchase. Hence, the individual must weigh the pros and cons of all types of mortgage loans available and decide the best fit, since there is no one size fits all.