Kinds of Mortgages: several different classifications of mortgages

There are several different classifications of mortgages. First, there are the straight-term and amortized types. There also are "first" mortgages and "second" mortgages (or "junior") mortgages. There are the "open-end" and "package" mortgage types. Finally, there are FHA-insured and VAguaranteed and conventional mortgages.

Mortgages are classified from the standpoint of the provision for repayment as follows: (a) straight-term and (b) amortized. The straight-term mortgage, which had been popular through the 1920's, but is quite uncommon today, is one which requires no payment on the principal during the term of the mortgage. The full amount of the mortgage falls due at the end of the period covered by the loan arrangement. When this type of mortgage was popular, the mortgage usually had a maturity period of three to five years, and interest rates commonly ranged up to 10 per cent. A down payment of 30 per cent to 50 per cent was frequently required, but more often than not, only interest and taxes were paid during the period of the loan and it would be renewed at maturity date. In periods of depression the lenders would find it necessary to "call in" these mortgages. At such times the mortgagors (i.e., the home buyers) usually could not repay the loan, and foreclosures followed.

An amortized mortgage, which is the more prevalent type today, is one which is repaid in specified amounts, frequently on a monthly basis, during the term of the mortgage. The payment includes payment against both principal and interest. In this type of mortgage, because the payments are in equal amounts each month, most of the early payments goes to interest, while near the end of the amortization period, most of the amount goes against principal. This results, of course, from the fact that as the principal is reduced, the amount of interest paid necessarily is less.

For the amortized mortgage today the most common arrangement requires the mortgagor to make a cash down payment ranging from 5 to 50 per cent and also the payment of certain other costs incidental to "closing" the mortgage. Amortization is usually spread over a period ranging from ten to thirty years (see discussion under "Lending Terms" later in this chapter). This planned repayment feature has made these mortgages considerably sounder than the earlier straight-term type.

This type of mortgage has improved the mortgage picture from both the lenders' and borrowers' viewpoint, since the borrower is forced to budget his finances and is building up an equity and the lender probably has changed his operation from a short-term speculative risk to a longer-term investment.

A "first" mortgage, another classification, is one which establishes for the lender a first claim against the owner's rights in the property. A second or junior mortgage is one which gives a lender a claim against the owner which is subordinate to the rights of the holder of the first mortgage, or of other paramount claims.

The junior mortgage is usually involved where the cash payment (that can be made by the home buyer) is too small to fill the gap between the first mortgage and the price of the house. The seller sometimes accepts the second mortgage as part payment. In some instances, however, the home owner may need to purchase appliances, landscape the yard, or probably needs cash for some other items. In such cases, a second mortgage is sometimes obtained from a household finance or loan agency for the purpose of consolidating the family's debts.

To overcome the possible problem of changing the mortgage, some home buyers obtain an "open-end" type. This permits the mortgagor to finance his further necessities without rewriting the loan. It has the advantage of the relatively low interest rate, which mortgages carry as compared with general short-term financing, but the disadvantage of incurring almost an indefinite debt obligation.

The "package" mortgage is one that includes household equipment such as ranges, refrigerators or air-conditioning units. These must be included when the mortgage is arranged. Another classification of mortgages is that of conventional--that is, any mortgage not Government-insured or guaranteed--and FHA-insured and VA-guaranteed mortgages.

The Federal Housing Administration, probably the best known of the housing agencies, undertakes to insure mortgages to guard against loss on the part of the lending institutions in the event of default by the borrower. This agency was primarily responsible for developing the long-term amortized mortgage at low interest rates. The exact terms of these loans have been varied over the years in response to economic conditions.

The Veteran's Administration, as one phase of its over-all GI program, has undertaken a program similar to the FHA, except that it "guarantees" instead of "insures" the mortgage" 8 The terms and requirements of its loans are very much like those of the FHA.

The Government-insured or guaranteed mortgages, attractive as they are, have by no means supplanted the so-called conventional mortgage, but they have had the effect of bringing that type of mortgage fairly close to their standards. There also is a difference in the price ranges of houses covered by the different types of mortgages, and a difference in their emphasis on old and new houses.

For example, FHA has tended to emphasize new construction, and houses in the middle-price brackets. Conventional mortgages, on the other hand, tend to be more popular among (a) old houses, (b) houses in the low-price brackets (because these are generally old houses), and (c) new units in the upper-price brackets where FHA and VA activity is restricted by law.

Source: Housing: A Factual Analysis