Personal Mortgage Guide

Private Loans Versus Government Loans

Mortgages come in all shapes and sizes. Conventional mortgages are typically purchased through private banks and mortgage lenders and often require a minimum down payment. Government-sponsored programs including those offered by the Federal Housing Authority (FHA) and Veteran's Authority (VA) offer loans with much lower down payments in exchange for the purchase of mortgage insurance by the home buyer. Loans are typically either fixed rate or adjustable rate with other unique loan products available in certain states.

Bankrate's mortgage guide points out that 15 and 30-year fixed rate loans are the most common mortgage products used by home buyers. These are loans that are amortized over the loan term, with interest rates remaining constant throughout. Adjustable rate mortgages (ARMs) and hybrid ARMs are available to borrowers that prefer a lower interest rate up front, in exchange for a potentially higher rate in the future. ARMs can have benefits initially but are riskier in the future because of interest rate and mortgage payment uncertainty.

Common debt ratios are used by lenders as a guide to home loan affordability. Debt-to-income is expressed as a percentage of your total debt (home loan, car, personal loans, credit card, etc.) to your income. Lenders prefer a debt-to-income ratio at 36 percent or below in most cases, according to the Lending Tree "Calculating Debt-to-Income" guide. Your mortgage payment (including principle, interest, taxes and insurance) should not exceed 28 percent of your income. These rules of thumb are sometimes flexible, especially if you make a significant down payment on the home.

Principle, interest, taxes and insurance are the four components commonly included in your monthly mortgage, or PITI payment. Payments are made monthly over the length of the repayment period, or until you pay off the loan balance. Each month, the portion of your payment that goes toward the principle loan balances increases while the interest amount decreases. This is why homeowners are often motivated to pay additional principle to expedite this process and pay off early. Taxes and your home insurance are usually escrowed by your lender and paid as due. Monthly installments are included with your mortgage payment.