The Conventional Mortgage Loan

If you haven’t had previous experience with real estate, you may find all the terms confusing. The mortgage or loan process can be equally mind boggling. One of the first things you should do when you decide to get into this market, is learn the language. A great way to do this is find a real estate dictionary on the Internet. Many mortgage and other types of real estate sites offer them for free. Education is an important key to your success.

There are all sorts of ways to borrow money. Unless you have a private source, you’ll most likely be using a lender that specializes in real estate. One of the first things you’ll learn is that most loans are called “conventional mortgage loan”. This basically means that they aren’t government programs.

There are several types of conventional mortgage loan available:

• 30-year
• 15-year
• 1-year adjustable rate mortgage (ARM)
• Hybrid ARM
• Balloon

It’s important to note that some of these conventional mortgage loan categories work in combination. For example you may take out a thirty year mortgage that is also a one year or hybrid ARM.

The thirty and fifteen year mortgages are just what they sound like. They mean that you’ll be making payments on your home for a period of fifteen or thirty years. The typical down payment is ten percent, but there is a lot of “creative” financing happening these days. You can always put more money down if you choose, and in some cases, you can obtain a mortgage while putting nothing down on the property.

Because interest is charged on loans, the sooner you can pay it off, the more you save in those costs. The principal is what you actually borrow, but interest is added as a cost for borrowing. If you have a thirty year loan, your monthly payments will be less, but over the years you’ll pay more interest. If you are able to pay it off in fifteen years, you’ll spend more each month, but save on interest in the long run. Making even one extra payment a year will save you money.

ARM means that the interest rate adjusts as the rates change. You can lock in a certain rate of interest, which many people do when rates are low. If you go for a one year ARM the rate locks in at the end of each year. If you choose the hybrid type, you choose to keep the rate the same for five, seven, or ten years. After that, the rates adjust each year. As you can see, these loans are risky because no one can predict for sure what interest rates are going to do over a period of time.

A balloon mortgage means that you choose to make payments as you would on a fifteen or thirty year mortgage, but agree that at the end of a certain period, the balance of the principal is due in full. As with ARM, it’s usually in five, seven, or ten years.

Click here to find more information on a conventional mortgage loan.