Types of Loans
Some types of loans.....
Fixed Rate Mortgage - Fixed rate loans are fully amortized loans characterized by a fixed interest rate and consistent monthly payment over the life of the loan. Fixed rate loans are typically for 15 or 30 years though they are sometimes marketed in 20 and 10 year increments.
Seller Financing
Seller financing is a financing where the seller loans funds to the buyer. It can only work obviously if the seller does not need all of the sales proceeds to buy their new home. Seller financing is one method buyers can use to circumvent having to pay for private mortgage insurance (PMI). If the buyer’s loan to value ratio (LTV) is greater than 80%, the buyer will be required to purchase PMI in order to get mortgage financing. As PMI is expensive and not tax deductible, buyers will often finance using either the 80-10-10 method or the 80-15-5. Seller financing can be sued to finance the second mortgage as opposed to a bank or mortgage company.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is insurance designed to protect the lender in case the borrower can not repay the loan. The insurance premiums are paid by the borrower buy are payable to the lender. PMI can be paid up front but is often capitalized into the loan. It is typically only taken out when the borrowers down payment is less than 20% of the value of the home (LTV of 80% or less). Once PMI is taken out it can be difficult to cancel as it may require a reappraisal of the property and approval of the lender.
Prequalification
Loan pre-qualification is a tentative decision on the part of a lender to pre-screen a borrower to determine the total loan amount a person can borrow as well as the loan terms they expect. The “pre” part of pre-qualification is important to keep in mind. Until the lender can verify the borrower’s credit worthiness (credit history, income, debt holdings, assets, and employment), any pre-qualification assertion should be viewed with caution. At the same time, a pre-qualification can give a borrower a good gauge to determine their buying power and loan terms while shopping for loans and homes.
Prepayment Penalty
A prepayment penalty is a fee charged by a lender for repaying a loan early. The reason lenders charge prepayment penalties is that the terms of a loan may not make it profitable for them unless the borrower pays on the loan deep into the life of the loan term. The prepayment penalty both offsets the lost income to the lender by losing the loan income and serves as a disincentive to the borrower to prepay. “No fee” loans often have prepayment penalties as the lender makes its money on the loan by charging higher interest over the life of the loan.
