A private mortgage can be a good or a bad option, depending on a number of factors such as your own financial and credit situation, the interest rates, the parties involved, as well as the borrower’s understanding of the entire financial arrangement in all intricate details. To start with, let’s first take a look at what exactly is a private mortgage.
Private Mortgage: The Definition
A private mortgage is essentially a term used to define any and all mortgage loans and contracts that are made between the borrower and a non-traditional lender. Now, this is where it gets interesting and confusing because you are most likely wondering which ones exactly are the traditional lenders, and which ones are not?
The Traditional and Non-Traditional Lenders
Traditional lenders are the banks and the popular credit unions that most home buyers go to first, or in other words, they are the most common options that more or less everyone is well aware of. However, all private mortgages are available from non-traditional lenders only by default, and they are called private mortgages because of that.
Any individual, company, or organization who is willing to lend money, negotiate the terms, and go into a legal contract with the borrower for the mortgage agreement, can become a non-traditional lender, which in turn, would qualify the mortgage arrangement in between the lender and the borrower, as a private mortgage.
Fixed-Rate Mortgage (FRM) and Adjustable Rate Mortgage (ARM)
Fixed-rate mortgages are the most popular type of private mortgages for the borrowing party because the rate of interest stays fixed to the agreed-upon percentage, from the day of the loan agreement’s beginning date to its closing/refinancing date.
FRMs offer a sense of certainty to the borrower, albeit at an interest rate which is usually much higher than what you would find with an adjustable-rate mortgage. ARMs can actually be a better deal though because they begin with a lower rate of interest than an FRM for the first tenure of the loan (which is a variable in between 3 – 10 years), after which, the rate may either increase or decrease, depending on what the market situation is at that point of time.
Assessment of Your Own Situation: Are You the Right Candidate for a Private Mortgage?
Every lender has a market that it specifically or primarily deals with, and nontraditional lenders usually deal with buyers who have any one or multiple of the following characteristics.
- Unsteady source of income
- Poor credit score
- History of bankruptcy on your credit record
- A need for urgent funds, probably brought on by the decision to buy a new house before selling the old one
- Trying to buy a property that does not have refinancing value
Now that we have discussed a few key aspects of private mortgage loans, it should be easier to make a decision. Knowledge is indeed power when it comes to managing financials, but make sure that your knowledge base is up to date, backed up by a mortgage lawyer’s experience and relevant to the party you are dealing with as well.