Types of Mortgage Loans
plans can be divided into categories in two different ways.
Firstly, conventional and government
loans. Secondly, all the various mortgage programs may be
fixed rate loans, adjustable rate loans and their
Conventional and Government Loans
loan other than an FHA, VA or an RHS loan is conventional one.
Housing Administration (FHA), which is part of the U.S. Dept. of
Housing and Urban Development (HUD), administers various
mortgage loan programs. FHA loans have lower down payment
requirements and are easier to qualify than conventional loans.
FHA loans cannot exceed the statutory limit.
VA loans are
guaranteed by U.S. Dept. of Veterans Affairs. The guaranty
allows veterans and service persons to obtain home loans with
favorable loan terms, usually without a down payment. In
addition, it is easier to qualify for a VA loan than a
conventional loan. The U.S. Department of Veterans Affairs does
not make loans, it guarantees loans made by lenders. VA
determines your eligibility and, if you are qualified, VA will
issue you a certificate of eligibility to be used in applying
for a VA loan. VA-guaranteed loans are obtained by making
application to private lending institutions.
Housing Service (RHS) of the U.S. Dept. of Agriculture
guarantees loans for rural residents with minimal closing costs
and no down payment.
Local Housing Programs
counties and cities provide low to moderate housing finance
programs, down payment assistance programs, or programs tailored
specifically for a first time buyer. These programs are
typically more lenient on the qualification guidelines and often
designed with lower upfront fees. Also, there are often loan
assistance programs offered at the local or state level such as
MCC (Mortgage Credit Certificate) which allows you a tax credit
for part of your interest payment. Most of these programs are
fixed rate mortgages and have interest rates lower than the
the maximum loan amount established by Fannie Mae and Freddie
Mac are known as 'jumbo' loans. Because jumbo loans are bought
and sold on a much smaller scale, they often have a little
higher interest rate than conforming, but the spread between the
two varies with the economy.
Fixed Rate Mortgages
fixed rate mortgage (FRM)
loan the interest rate and your mortgage monthly payments remain
fixed for the period of the loan. Fixed-rate mortgages are
available for 30, 25, 20, 15 years and 10 years. Generally, the
shorter the term of a loan, the lower the interest rate you
popular mortgage terms are 30 and 15 years. With the traditional
30-year fixed rate mortgage your monthly payments are lower than
they would be on a shorter term loan. But if you can afford
higher monthly payments a 15-year fixed-rate mortgage allows you
to repay your loan twice as faster and save more than half the
total interest costs of a 30-year loan.
on fixed rate fully amortizing loans are calculated so that at
the end of the term the mortgage loan is paid in full. During
the early amortization period, a large percentage of the monthly
payment is used for paying the interest. As the loan is paid
down, more of the monthly payment is applied to principal.
bi-weekly mortgage plan you pay half of the monthly mortgage
payment every 2 weeks. It allows you to repay a loan much
faster. For example, a 30 year loan can be paid off within 18 to
loans are short-term fixed rate loans that have fixed monthly
payments based usually upon a 30-year fully amortizing schedule
and a lump sum payment at the end of its term. Usually they have
terms of 3, 5, and 7 years.
advantage of this type of loan is that the interest rate on
balloon loans is generally lower than 30- and 15- year mortgages
resulting in lower monthly payments. The disadvantage is that at
the end of the term you will have to come up with a lump sum to
pay off your lender, either through a refinance or from your own
Balloon loans with refinancing option
allow borrowers to convert the mortgage at the end of the
balloon period to a fixed rate loan -- based upon the
outstanding principal balance -- if certain conditions are met.
If you refinance the loan at maturity you need not be
requalified, nor the property reapproved. The interest rate on
the new loan is a current rate at the time of conversion. There
might be a minimal processing fee to obtain the new loan. The
most popular terms are 5/25 Balloon, and 7/23 Balloon.
Adjustable Rate Mortgages
adjustable loan is loan whose
interest rate, and accordingly monthly payments, fluctuate over
the period of the loan. With this type of mortgage, periodic
adjustments based on changes in a defined index are made to the
interest rate. The index for your particular loan is established
at the time of application.
Combined (Hibrid) Loans
loans, a combination of fixed and ARM loans, come in different
fixed-period ARMs homeowners can enjoy from three to ten years
of fixed payments before the initial interest rate change. At
the end of the fixed period, the interest rate will adjust
annually. Fixed-period ARMs -- 30/3/1, 30/5/1, 30/7/1 and
30/10/1 -- are generally tied to the one-year Treasury
securities index. ARMs with an initial fixed period beside of
lifetime and adjustment caps usually have also first adjustment
cap. It limits the interest rate you will pay the first time
your rate is adjusted. First adjustment caps vary with type of
advantage of these loans is that the interest rate is lower than
for a 30-year fixed (the lender is not locked in for as long so
their risk is lower and they can charge less) but you still get
the advantage of a fixed rate for a period of time.
mortgages have a fixed rate for a certain time, most often 5 or
7 years, and then interest rate changes to a current market
rate. After that adjustment the mortgage maintains new fixed
rate for the remaining 23 or 25 years.
come with option to convert them to a fixed-rate mortgage at
designated times (usually during the first five years on the
adjustment date), if you see interest rates starting to rise.
The new rate is established at the current market rate for
conversion is typically done for a nominal fee and requires
almost no paperwork. The disadvantage is that the conversion
interest rate is typically a little higher than the market rate
at that time.
kind of convertible mortgage is a fixed rate loan with rate
reduction option. If rates had dropped since the time of closing
it allows you, under some prescribed conditions, for a small
conversion fee to adjust your mortgage to going market rate.
Generally the interest rate or discount points may be a little
higher for a convertible loan.
Payment Mortgages (GPMs)
payment mortgages have payments that start low and gradually
increase at predetermined times. A lower initial payments allow
you to qualify for a larger loan amount. The monthly payments
will eventually be higher in order to catch up from the lower
payments. In fact, your loan will be negatively amortizing
during the early years of the loan, then pay off the principal
at an accelerated pace through the later years.
offer different GPM payment plans, which vary in the rate of
payment increases and the number of years over which the
payments will increase. The greater the rate of increase or the
longer the period of increase, the lower the mortgage payments
in the early years.
buydown is the type of loan with an initially discounted
interest rate which gradually increases to an agreed-upon fixed
rate usually within one to three years. An initially discounted
rate allows you to qualify for more house with the same income
and gives you the advantage of lower initial monthly payments
for the first years of the loan when extra money may be needed
for furnishings or home improvements. To reduce your monthly
payments during the first few years of a mortgage you make an
initial lump sum payment to the lender. If you do not have the
cash to pay for the buydown, the lender can pay this fee if you
agree on a little higher interest rate.