A mortgage loan refers to money that is lent specifically for the purchase of real estate while simultaneously being secured by that purchased real estate. These financing tools are also called home loans, property loans, or shortened to simply “mortgages.”
The term “mortgage loan” is one that’s been around for nearly a thousand years, with roots dating back to Medieval Europe. The earliest mentions of a mortgage system can be found in the late twelfth century where English Common Law protected lenders by giving them access to a debtor’s property in the event that debtor defaulted on his or her loan. In other words, if a debtor failed to repay a lender, that lender could legally sell the debtor’s property and take the proceeds as repayment.
While the fundamentals of our current American mortgage system are virtually the same, the home loans offered today are far more refined, specialized, and consumer-friendly.
Today, borrowers from all walks of life can finance a piece of property through the use of specific mortgages. Some of these more common home loan options include:
- FHA mortgages
- VA loans
- Conventional mortgage loans
If a prospective homeowner doesn’t have the best credit, they can lean on the government and make use of an FHA home loan, which is a mortgage backed by the Federal Housing Administration.
Veterans, active service members, and certain surviving spouses can look into VA home loans, which are mortgages provided by the Office of Veteran’s Affairs.
Finally, for those who prefer the more traditional route, there are the tried-and-true conventional mortgage loans.
After deciding on what type of loan you want, you must then decide on how you would like the interest to work and over what duration you’d like to repay your loan. Historically, first-time homebuyers have favored fixed-interest loans over a term of 30 years. However, there are also 15- and 20-year options for those who can afford higher payments.
Others prefer to use “adjustable rate” mortgages, more commonly known as ARMs. But taking out an ARM is not a decision to make lightly. The rates on ARMs adjust yearly and can often lead to higher monthly bills that borrowers didn’t necessarily plan for. In fact, Stan J. Liebowitz, author and economics professor at the University of Dallas, argues that ARMs were ultimately responsible for the recent mortgage crisis due to the amount of borrowers who were unable to keep up with the adjusting payments. Consequently, they should only be utilized by those who have a keen understanding of how these products work.
Here are some quick tips for prospective homebuyers, along with links to more detailed explanations of each:
- A down payment of 20 percent or more is needed to avoid private mortgage insurance (PMI).
- Lenders will typically only approve a loan request that borrowers can afford.
- Finally, you have to decide whether you want a fixed interest rate or an adjustable interest rate.
For more information on home financing, be sure to read our articles (which are found below or by viewing the index here). If you’re a first-time homebuyer, then you should take some time to read over our home loan FAQs. Finally, for those who are actively monitoring the market, our mortgage news stories cover some of the latest real estate happenings.