About Housing Loans
To a large extent the types of housing loans most commonly used are contingent on the economic condition of the housing market. Housing markets favor the buyer when there is a large inventory of homes available for sale: housing prices are lower and housing loans are easier to qualify for. In a seller's market, housing inventories are lower, increasing demand, pushing up prices, and making housing loans more difficult to qualify for.
Prospective home buyers today must understand not only the different types of housing loans on the market today; it is essential that would-be homeowners understand what type of housing loan will best meet their needs.
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Amortized Housing Loans
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With an amortized housing loan or a conventional loan the mortgage payments are equally divided through the life of the loan and the interest rate is fixed. The borrower of an amortized housing loan pays on the principal and the interest each month, with more money going to satisfy the interest in the beginning of the loan. Toward the end of the amortized housing loan or mortgage, more money is applied to the principal.
Adjustable Rate Mortgages
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Presently, the adjustable rate mortgage (ARM) represents almost half of all housing loans. Typical characteristics of an ARM include an interest rate that fluctuates throughout the life of the housing loan, with monthly loan payments increasing or decreasing depending on the interest rate identified in the housing loan contract. In general, housing loan payments under an ARM are lower initially and increase annually.
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Hybrid Mortgage Loans
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There are some housing loans that start out as an ARM then convert to an amortized housing loan; the same is true in reverse. These housing loans are called hybrid mortgage loans.
Housing loans for existing homeowners are second mortgage loans based on the equity of the home. When the market value of the home is more than the amount owed on the original housing loan the homeowner has equity that may be borrowed on.
Reverse Mortgage Loans
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Housing loans specifically for elder homeowners who have earned a considerable amount of equity are called reverse mortgage loans. Typical features of the reverse mortgage include fixed monthly payments to the homeowner for life. Upon the death of the homeowner the home is sold to pay off the loan, with any remaining cash given to the homeowner's heirs.
Wraparound Loan
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Housing loans that the seller continues to pay after the home is purchased is called a wraparound loan. The buyer obtains a new housing loan that "wraps around" the first housing loan.
Purchase Money Loan
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There are many other types of housing loans like the purchase money loan where the seller is the mortgage lender. Conforming loans meet the requirements of institutional housing loan lenders like Fannie Mae and Freddie Mac. There are also non-conforming loans that do not meet the requirements of Fannie Mae and Freddie Mac.
Housing loans allow consumers to purchase the single most important investment they will make in their lifetime. Understanding and obtaining the housing loan that best meets the needs of each individual buyer represents money in the bank.
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