MainLoan TypesAbout CreditLoan DangersAbout/ContactAvoiding ForeclosureSub-Prime Options
PR/ArticlesEmail UsConsultationFHA siteBrutal Facts E-BookHUD 1/GFE Review

The Various Types of Mortgages

...a brief overview of options
Conforming/Conventional:
These are mortgages that are designed for people who fit into nice neat guidelines set down by the two main quasi-goverment agencies (Freddy Mac and Fannie Mae).  They are designed for situations where credit is good to excellent, income comes from verified sources or an established self employment history, there is a minimum down payment, and mortgage insurance.  The rates usually quoted by lenders in ads are these types of programs.
Non-Conforming:
These are usually large loans over the standard Fannie Mae limits.  Effective 1/1/08 these limts are for $417,000 for a single family residence in most of the US.  They can include portfolio loans specific to a borrowers situation.  They usually carry a slightly higher interest rate and expanded underwriting requirements.
SubPrime:
These programs are designed for those people who do not fit into the guidelines.  There are hundreds of different types of programs depending on the lender and situation of the borrower.  Most of these programs are variations of Adjustable Mortgages (ARMS), with higher (often MUCH higher) interest rates. Depending on the program, there could be little or no down payment, options for gifts or seller equity, second mortgages on top of the first, and terms with expectations of early refinance/repayment.  These programs often allow people the opportunity to get into a home who would not normally be able to obtain financing. They also present the most dangers for borrowers and profit for lenders.






Would you like to
talk to a MorgageExam
expert? Please go to
our About Our MORTGAGE EXAM Consulting Services
Page for information
on how to get a phone
consultation
and a written report

There are MANY types
of mortgage programs.
Don't just rely on what
your broker/banker
has offered.  Some
mortgages are better
suited for certain
situations than
others.  When you are
talking about thousands
of dollars...you need a
second opinion!

What is a Credit score and how can you improve it?

What is a Mortgage Exam consultation and how to contact?

What are the alternative options for borrowers with damaged credit or low down payment?


BBQofTheMonth.com

MORTGAGE TYPES in Brief...

Fixed Rate Mortgages

Consider a fixed rate mortgage if either of the following describes you:

  • You plan on living in your new home for many years, and/or
  • You are not a risk-taker and prefer the stability of knowing how much your payment will be each month.

Since most home loans are for a period of 30 years, if you want a payment you can count on for that long of a period of time, a fixed rate mortgage may be what works best for you. Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Making extra payments to principal will allow you to pay your loan off sooner.

This may not always be the best choice, however. If interest rates are very high at the time you take out your loan, with a fixed rate mortgage you'll be stuck with that high interest for the life of the loan (unless you choose to refinance). Conversely, if interest rates are very low, you'll come out the winner with interest rates that will stay low no matter how high interest rates go in the future.

The following are descriptions of the varying lengths and terms of fixed-rate mortgages:

    15-Year Fixed-Rate:

  • You to pay off the loan in half the time of a 30-year loan.
  • Equity builds up more quickly than in a 30-year loan.
  • Payments are higher (which may be a problem if you lose your job or become unable to work).

    20-Year Fixed-Rate:

  • You to pay off the loan in 2/3 the time of a 30-year loan.
  • The overall interest paid is considerably less than for a 30-year loan.

    30-Year Fixed-Rate:

  • The most common choice, especially for first-time homebuyers, as it's the easiest of the fixed-rate loans to qualify for.
  • Monthly payments are lower than for 15-year and 20-year loans. This can prove especially helpful if you don't have a lot of "padding" between the amount you can afford to spend & the monthly payment for your desired property.
  • More desirable if you plan on staying in the same home for years, since equity builds more slowly than for shorter-term loans.
  • For income tax purposes, this term provides the maximum interest deduction.
  • There are also 40-Year Fixed-Rate mortgages now available.  The problem here is the slower accumulation of equity for a slightly lower monthly payment. NOT suggested!

Adjustable-Rate Mortgages (ARMs)

If you are more comfortable in taking a risk with your money or if interest rates are very high at the time you take out your loan, an adjustable-rate mortgage (ARM) may be the solution for you. You might also choose this type of loan if your planned ownership of the property is short-term or if you expect your income to increase to cover any potential rise in the interest rate.

Generally, the interest rate when you take out your loan will be lower than a fixed-rate mortgage. Please note that this is true initially, not
necessarily long-term .

Since an ARM rate rises and falls depending on the prevailing interest rate, your mortgage payment will rise and fall accordingly. If your income isn't sufficient to cover the highest possible payments, then this option isn't for you. On the positive side, the lower initial payments will allow you to qualify for a larger loan than if you choose a fixed-rate. The downside is that your payments will increase if/when the rates go up.

Typically, ARM interest rates are tied to a specific financial index (such as Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed Arms or COFi, or LIBOR [London Interbank Offered Rate]) and your payment will be based on the index your lender uses plus a margin, generally of two to three points. Get the formula used by your lender in writing and make sure you understand what it means.

Fortunately, the amount an ARM can increase is not unlimited. There are "caps" on how much your lender can increase your rate, both for a period of six months or one year and for the life of the loan. Plan ahead, and have your lender calculate what the maximum payment would be if your rate went to the highest amount allowed by the cap for your particular mortgage. If you're not confident you'll be able to pay that amount on a monthly basis, perhaps you should reconsider this type of loan.

Convertible ARMs

If neither the fixed-rate nor the adjustable-rate mortgage seems the best option, perhaps the convertible ARM will be right for you. This alternative combines the initial advantage of an ARM with a fixed rate after a predetermined number of years. Obviously, this type of mortgage has more advantages when the initial interest rate is low and the future rate is not guaranteed.

Government Loans

Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.

VA Loans: Veterans may qualify for a loan from the Veterans
Administration. There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.

FHA Loans: The Federal Housing Association offers loans lower-income Americans. Look for the phrase "FHA approved" when looking at ads for homes.  One of the best-unknown values in mortgages (In spite of what many lenders will tell you!) is the FHA Adjustable.  Caps of no more than 1% a year up OR DOWN, a low start rate and historically, this type of loan can adjust at a rate that makes refinancing unnecessary.
Copyright . JAAM, Inc.. All rights reserved.