Mortgage loans are a huge component of any real estate transaction, so it’s essential to understand what they are, how they work, and what basic types exist. This article covers package mortgages, how they differ from other loans, and what you need to know for the real estate exam.
What Is a Package Mortgage?
A package mortgage is a loan that covers the purchase of real estate and the personal property inside, using both as collateral for the loan.
For example, a home has a value of $200,000 but has $50,000 of kitchen appliances and furniture inside. A package mortgage is then obtained for $250,000 so that the home and personal property are purchased within the same loan.
Advantages of a Package Mortgage
The advantage of a package mortgage is that it allows the buyer to make one payment with a low-interest rate for the house and personal property over a period of time. This is an excellent option if the buyer can not save enough income to cover a down payment, closing costs, fees, and personal property. The alternative would be purchasing the appliances and furniture separately for cash or financing methods such as credit cards with higher interest rates.
Disadvantages of a Package Mortgage
The downside to a package mortgage is that because the lender includes personal property with the house in the loan, the lender uses both as collateral if the borrowers do not pay their mortgage payments. Therefore, borrowers are prohibited from selling any included personal property without lender approval.
How Do Mortgages Work?
Before jumping into the many kinds of mortgages, buyers can obtain, let’s go over a few basics. A mortgage is a voluntary lien placed on a property, with an agreement between a buyer and a lender to repay the loan over time.
To obtain a mortgage, the buyer must qualify based on the lender’s criteria and mortgage standards. Lenders typically look at credit history, debts, income, and home ownership costs based on the current market.
You may also hear the acronym PITI in your studies. This stands for principal, interest, taxes, and insurance, which are the four costs a mortgage company includes when reviewing a loan for approval.
What are the Different Types of Mortgages?
Now that we’ve covered package mortgages and how mortgages work let’s go over the different types of financing you may see as alternative answers on the real estate exam. Mortgages fall into five major categories; conventional, jumbo, government-backed, fixed-rate, and variable rate. Within these categories are many other classifications that you must be familiar with.
These are the most common type of mortgage. The federal government does not back these loans, and they usually require higher down payment and qualifications.
A jumbo loan is typically used on a house with a higher purchase price, say around $700,000. The price depends on various factors, including county or local standards.
Any loan with a fixed interest rate for the loan duration. If you secure a 30-year FHA mortgage, your interest rate will be the same for 30 years.
Adjustable Rate mortgage (ARM)
Adjustable Rate mortgages are loans in which the interest rate changes every year instead of a fixed-rate mortgage where it remains the same for the duration of the loan. These are advantageous if the borrower believes the rate will go lower.
Federal Housing Administration (FHA)
These loans are insured by the Federal Housing Administration and backed by the government. The advantage is that they require a lower down payment and credit score than conventional.
VA or Department of Veterans Affairs
Loans backed by the Department of Veterans Affairs are available for military members or veterans. VA loans require no down payment.
USDA or U.S Department of Agriculture
USDA loans are backed by the U.S Department of Agriculture and are granted in rural areas and generally require no down payment.
These loans finance a house being built or renovated, hence the name construction.
Home Equity Loan
A home equity loan is a second mortgage in which the homeowners use the equity they have built-in their home and borrow against it.
Purchase Money Mortgage
This is also known as seller financing. The seller of the property carries the note for the loan; in other words, they act as the bank, with the buyer making monthly payments directly to them.
A loan with lower payments initially, but at the end of the loan period, the buyers must repay the mortgage in full with a large “balloon” payment.
This type of loan is used to purchase multiple properties or parcels of land.
What Is the Difference Between a Package Mortgage and Blanket Mortgage?
Package mortgages are loans that finance the house and personal property inside. Blanket mortgages involve grouping property together under one loan.
For those of you who don’t know blanket mortgage are mortgages that cover two or more real estate pieces. Blanket mortgages are designed to enable investors, builders, and developers to mortgage more efficiently. Within a blanket mortgage, investors place multiple properties under a single loan, which is much more efficient than having various single property mortgages.
So while package mortgages combine real and personal property, blanket mortgages combine real property with more real property. See the difference?
What to Know for the Real Estate Exam
For the real estate exam, you will need to know that a package mortgage is a loan that covers the purchase of real estate and the personal property inside, such as furniture or appliances, using both as collateral for the loan.
It will also be helpful to understand the significant differences between mortgage types such as Conventional, FHA, VA, USDA, fixed, and variable interest mortgages.
Remember that package mortgages are not the same as blanket mortgages and understand the difference between the two. A blanket mortgage allows someone to purchase multiple separate properties, while package mortgages are solely for one property (with personal property included).