Mortgages in USA
Mortgages in the United States Types of Mortgage Instruments Two types of mortgage instruments are used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.
The mortgage In all but a few states, a mortgage creates a lien on the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the land to pay the debt.
The deed of trust The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien and not a title transfer, regardless of its terms. It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee. It is also possible to foreclose them through a judicial proceeding. Most "mortgages" in California are actually deeds of trust. The effective difference is that the foreclosure process can be much faster for a deed of trust than for a mortgage, on the order of 3 months rather than a year. Deeds of trust to secure a debts should not be confused with deeds to trustees to create trusts for other purposes, such as estate planning. Though there are superficial similarities in the form, many states hold deeds of trust to secure repayment of debts do not create true trust arrangements.
Mortgage loan types There are many types of mortgage loans. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM). Historical U.S. Prime RatesIn a FRM, the interest rate, and hence monthly payment, remains fixed for the life (or term) of the loan. In the U.S., the term is usually for 10, 15, 20, or 30 years (15 and 30 being the most common). However recently lenders have introduced terms that are amoritized over 40 and 50 year terms. The only increase a consumer might see in their monthly payments would result from an increase in their property taxes or insurance rates (paid using an escrow account, if they've opted to use an escrow). But payments for principal and interest will be consistent throughout the life of the loan using an FRM. In an ARM, the interest rate is fixed for a period of time, after which it will periodically (annually or monthly) adjust up or down to some market index. Common indices in the U.S. include the Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"). Other indexes like 11th District Cost of Funds Index, COSI, and MTA, are also available but are less popular. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain. Since the risk is transferred, lenders will usually make the initial interest rate of the ARM's note anywhere from 0.5% to 2% lower than the average 30-year fixed rate. Additionally, lenders rely on credit reports and credit scores derived from them. The higher the score, the more creditworthy the borrower is assumed to be. Favorable interest rates are offered to buyers with high scores. Lower scores indicate higher risk to the lender, and lenders require higher interest rates in such scenarios to compensate for increased risk. A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term. This payment is sometimes referred to as a "balloon payment". A balloon loan can be either a Fixed or Adjustable in terms of the Interest Rate. Many Second Trust mortgages use this feature. The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due. A contract could be written up so there would be more than one "balloon payment" required to be paid during the life of the loan.
Other loan types:
Assumed mortgage
Balloon mortgage
Blanket loan
Bridge loan
Budget loan
Buydown mortgage
Commercial loan
Equity loan
Foreign National mortgage
Graduated payment mortgage loan
Hard money loan
Jumbo mortgages
Package loan
Participation mortgage
Reverse mortgage
Repayment mortgage
Seasoned mortgage
Term loan or Interest-only loan
Wraparound mortgage
Negative amortization loan
Non-Conforming Mortgage