What Is a Home Mortgage? Definition, Qualification, and Types

About Home Mortgage:

A home mortgage is a loan given by a bank, mortgage company, or other financial institution for the purchase of a residence—a primary residence, a secondary residence, or an investment residence—in contrast to a piece of commercial or industrial property. In a home mortgage, the owner of the property (the borrower) transfers the title to the lender on the condition that the title will be transferred back to the owner once the final loan payment has been made and other terms of the mortgage have been met.1

A home mortgage is one of the most common forms of debt, and it is also one of the most recommended. Because they are secured debt—an asset (the residence) that acts as backing for the loan—mortgages come with lower interest rates than almost any other kind of loan that an individual consumer can find.

KEY TAKEAWAYS:

  • A home mortgage is a loan given by a bank, mortgage company, or other financial institution for the purchase of a residence.
  • A home mortgage will have either a fixed or floating interest rate, and a life span of anywhere from three to 30 years.2
  • The lender who extends the home mortgage retains the title to the property, which it gives to the borrower when the mortgage is paid off.

How a Home Mortgage Works?

Home mortgages allow a much broader group of citizens the chance to own real estate, as the entire purchase price of the house doesn’t have to be provided upfront. But because the lender actually holds the title for as long as the mortgage is in effect, it has the right to foreclose on the home (seize it from the homeowner and sell it on the open market) if the borrower can’t make the payments.

A home mortgage will have either a fixed or floating interest rate, which is paid monthly along with a contribution to the principal loan amount. In a fixed-rate mortgage, the interest rate and the periodic payment are generally the same each period. In an adjustable-rate home mortgage, the interest rate and periodic payment vary. Interest rates on adjustable-rate home mortgages are generally lower than fixed-rate home mortgages because the borrower bears the risk of an increase in interest rates.3

Either way, the mortgage works the same way: As the homeowner pays down the principal over time, the interest is calculated on a smaller base so that future mortgage payments apply more toward principal reduction than just paying the interest charges.

Types of Mortgages

There are different types of mortgage loans that a borrower may use to purchase a home. Generally speaking, they can be grouped into three broad categories: conventional loans, Federal Home Administration (FHA) loans, and specialty loans.

Conventional Loans:

Conventional mortgage loans are not part of a specific government loan program. These loans can be conforming, meaning that they adhere to mortgage rules set by Fannie Mae and Freddie Mac, or nonconforming. Private mortgage insurance may be required for conventional loans when the borrower puts less than 20% down.4

Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change:

FHA Loans:

FHA loans are mortgage loans issued by private lenders and backed by the federal government. Key characteristics of FHA loans include lower credit score requirements and lower down payment requirements. It’s possible to get approved for an FHA loan with a credit score as low as 580 and a down payment of 3.5% or a credit score as low as 500 and a 10% down payment.6

Specialty Loans:

Specialty mortgage loans are loans that don’t fit into the conventional or FHA loan categories. This includes U.S. Department of Veterans Affairs (VA) loans, which are designed for veterans and their families, and U.S. Department of Agriculture (USDA) loans, which allow borrowers in eligible rural areas to purchase homes with no down payment.

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