Mortgage Loans: Options

When applying for Mortgage Loans, there are so many factors to consider that it can challenge even the most knowledgeable professional.

Here, we take a closer look at various components of mortgage loans: i.e., mortgage loan types; loan-to-value ratio and downpayments; home equity loans; payment and debt ratios; and standard or conforming mortgages.

Mortgage Loans: Examining Mortgage Loan Types

Following are three (3) of the most common types of Mortgage Loans.

Type 1: Open Mortgages

An open mortgage is one of the most popular Mortgage Loans because it can be paid off at any time with little or no prepayment penalty. Another advantage is that borrowers can also renew or refinance any amount of the outstanding balance as they wish, also with no penalty.

Open Mortgages work best for those who don’t plan to be in their home for a long period of time (for whatever reason) and/or who have transitory jobs that force them to move a lot.

Type 2: Closed Mortgages

A Closed Mortgage is in many ways the direct opposite of an Open Mortgage. People who opt for a closed mortgage plan to keep their property for the length of the mortgage term. Generally the lenders offer better rates in closed term mortgages compared to open term mortgages. Mortgage loans of this type can save borrowers thousands of dollars in interest payments over the years. Mortgage loan types of this nature could incur prepayment penalties – meaning, if you pay off the principle early, you will pay penalties to the lender.

Closed Mortgages work best for homeowners who have what’s considered a stable lifestyle – i.e., they don’t plan to move any time soon.

Type 3: Variable Rate Mortgages

Variable Rate Mortgage Loans are those where the interest rates fluctuates during the term of the mortgage. The fluctuation is usually based on the prime bank rate or the rate of the lender.

These types of mortgage loans are used by borrowers for a number of reasons (eg, to buy a more expensive house). Because interest rates on these types of mortgage loans tend to be lower in the beginning, borrowers who expect their income to increase in the next few years can purchase a more expensive home now, instead of waiting for a few more years.

Mortgage Loans: Loan-to-Value Ratio and Downpayments

A Loan-to-Value Ratio is simply the mortgage amount divided by the appraised value of a given property. Before granting mortgage loans, lenders like to see a certain Loan-to-Value ratio – usually 75%.

To illustrate this, let’s say you want to buy a property appraised at $175,000. You have $25,000 as a downpayment, so you need to borrow $150,000. The $150,000 (mortgage amount) divided by $175,000 (appraised value of property) gives a Loan-to-Value Ratio of 85%.

You’ll have a hard time finding a lender to grant mortgage loans for this property. The property needs to appraise for at least $200,000 to have a Loan-to-Value Ratio of 75%. In this case, you can do two things – either look for a cheaper property or put up a bigger downpayment.

Speaking of downpayment, most mortgage loans require at least a 5% downpayment. Following are some general guidelines for downpayments as they pertain to different borrowers and specific situations.

Mortgage Loans: Downpayments for foreign buyers

Mortgage loans for foreign buyers generally require a 35% downpayment.

Mortgage Loans: Downpayments for investors

Mortgage loans for investors generally require them to put down 10% – 25% depending on their credit rating, citizenship status and other factors.

Mortgage Loans: An overview of Home Equity Loans

Home equity loans are simply mortgage loans that allow you to borrow against the equity in your home.

To use a simple example, if your home is worth $100,000 and you only owe $40,000 on your current mortgage, then you have $60,000 in equity in your home.

Most lenders will let you take out mortgage loans against up to 90% of the equity in your home. In the example above, if you have $60,000 worth of equity in your home, you can ostensibly take out a loan for $54,000 (90% of $60,000). Your home equity loans mortgage would be for $54,000.

Many homeowners use home equity loans to pay off non-mortgage related debt like credit cards, university loans, home expansions, etc. Mortgage loans like Home Equity Loans are great financial tools – but only if used wisely.

Mortgage Loans: An overview of Payment and Debt Ratios

Before granting mortgage loans, lenders look at Payment and Debt Ratios. What are they? Quite simply, the amount of debt obligations you have in relation to the amount of income you earn. Mortgage loans are usually granted when the Debt-to-Income Ratio (i.e., Payment and Debt Ratio) is 36% or less.

Let’s look at a simple calculation. Suppose that your total monthly income is $4,500 and your debt obligations come to $895 per month (this does not include rent). To find out how much of a mortgage you can afford, do the following:

$4,500 (monthly income) x .36 (ideal Payment and Debts Ratio) = $1,620.

$4,500 – $1,620 = $2,880 (this is the amount left to pay debts)

$2,880 – $895 (existing debt obligation) = $1,985 (the maximum amount your mortgage can be, including insurance and taxes).

Note: Some mortgage loans lenders will grant mortgage loans when the payment and debt ratios are as high as 45%, but certain stipulations apply. Follow the steps above, plugging in .45 where .36 is, to find out how much mortgage you can afford using this payment and debts ratio.

Mortgage Loans: Standard or Conforming Mortgages

Standard or Conforming Mortgage Loans are those that can easily be resold by mortgage lenders. According to Wikipedia, “… standard or conforming mortgages … define a perceived acceptable level of risk, which may be formal or informal, and may be reinforced by laws, government intervention, or market practice.”

Lenders like Standard or Conforming Mortgages because buyers who take them out are less likely to default. They are available only to those buyers with the best credit.