What Is a Mortgage || Definition

What Is a Mortgage || Definition

 What Is a Mortgage?

There are two componWhatents to your mortgage payment—principal and interest. Principal refers to the loan amount. Interest is an additional amount (calculated as a percentage of the principal) that lenders charge you for the privilege of borrowing money that you can repay over time. During your mortgage term, you pay in monthly installments based on an amortization schedule set by your lender.

Another factor involved in pricing a mortgage is the annual percentage rate (APR), which assesses the total cost of a loan. APR includes the interest rate and other loan fees.

The Six Main Types of Mortgages

Not all mortgage products are created equal. Some have more stringent guidelines than others. Some lenders might require a 20% down payment, while others require as little as 3% of the home’s purchase price. To qualify for some types of loans, you need pristine credit. Others are geared toward borrowers with less-than-stellar credit.

The U.S. government isn’t a lender, but it does guarantee certain types of loans that meet stringent eligibility requirements for income, loan limits, and geographic areas. Here’s a rundown of various possible mortgage loans.

 Fannie Mae and Freddie Mac are two government-sponsored enterprises that buy and sell most of the conventional mortgages in the U.S.

1. Conventional Mortgages

A conventional loan is a loan that is not backed by the federal government. Borrowers with good credit, stable employment and income histories, and the ability to make a 3% down payment can usually qualify for a conventional loan backed by Fannie Mae or Freddie Mac, two government-sponsored enterprises that buy and sell most conventional mortgages in the United States.12

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To avoid needing private mortgage insurance (PMI), borrowers generally need to make a 20% down payment.3 Some lenders also offer conventional loans with low down payment requirements and no private mortgage insurance.

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2. Conforming Mortgage Loans

Conforming loans are bound by maximum loan limits set by the federal government. These limits vary by geographic area. For 2021, the Federal Housing Finance Agency set the baseline conforming loan limit (CLL) at $548,250 for one-unit properties.