Home Lending Practices

Home Lending Practices

Home Lending Practices

Overview

Purchasing a home is not an impossible pursuit for most Americans, thanks to a multitude of programs and services available to assist in the process. Central to home buying is the mortgage, a financial arrangement between the lender and the consumer. Mortgages come in many forms and offer a wide range of products that can fit the needs of the buyer over the short and long terms. This paper will explore the myriad of mortgage products that are available for consumers who seek to purchase land and/or a home of their own.

A Look at Mortgages

Derived from an old French term meaning "dead pledge," a mortgage is technically a security for a loan that is used (usually) to finance the purchase of real estate. Mortgages have a defined life expectancy with specific terms of payment and interest rates. Mortgages have been in existence for more than 800 years, dating back to late-12th century England, in which common law allowed the creditor to have an interest in the property of the individual who borrowed his or her money. Mortgages became increasingly popular during the latter 19th century, when more and people were purchasing land and building homes for their own. The mortgage system was not ideal for every consumer, however, as most people who received a mortgage had to pay a 50% down payment in order to receive the mortgage.

When the Great Depression began in 1929, mortgages virtually disappeared, as creditors had no money to lend and consumers had no money to put into a mortgage. However, as part of his New Deal, President Franklin Delano Roosevelt in 1934 created the Federal Housing Administration (FHA) to protect lenders from default. In addition to giving mortgage providers greater security (thereby enticing lenders to provide more programs), the FHA introduced the concept of a 30-year fixed rate mortgage, which helped homeowners repay their loans over a longer time.

Discussion

Conventional Mortgages

Conventional mortgages have long enjoyed a considerable degree of popularity among home buyers. They are expensive, to be sure, as such loans require a 15-20 percent down payment. Then again, such high down payments also ensures early equity, an effective defense against a poorly performing housing market. Additionally, conventional mortgages offer some of the lowest interest rates on the market, particularly in comparison to those secured by government lenders (Kerr, 2009). For those who can afford them, conventional mortgages offer a great deal of stability and security, particularly in an uncertain economic climate.

Fixed Rate & Adjustable Mortgages

In general terms, conventional loans may be seen in two forms. The first is a fixed-rate mortgage (FRM). As the name suggests, fixed rate mortgages retain a locked-in interest rate over the life of the loan, which is determined upon the finalization of the agreement. Generally, these types of loans are on a 15- and 30-year basis, giving the consumer a formal framework in which to repay.

The obvious benefit of an FRM is stability, a factor that is extremely relevant in times of ...