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Types
of Mortgages Explained :
 Fixed-Rate
Mortgages
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Fixed-rate mortgages are
traditionally the most popular type of mortgage in America. They are typically
taken out over a 30-year period, but lengths of 15 to 25 years are also
available. The interest rate and monthly mortgage payment on a fixed-rate
mortgage remains the same throughout the entire life of the loan. The main
advantage of a fixed-rate mortgage is that the borrower knows exactly what
their monthly costs will be until the entire mortgage has been completely paid
out. The main disadvantage is that the borrower pays a premium for this
guarantee in the form of slightly higher interest rates.
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| Adjustable-Rate Mortgages |
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With adjustable-rate mortgages (ARM's) the
interest rate is linked to current market rates and fluctuates with economic
changes. When interest rates go down, so do your mortgage payments. When rates
go up, your mortgage payments increase accordingly. ARM interest rates are
usually set lower than those found in fixed-rate mortgage, at least at the
beginning of the term. This means that a homebuyer opting for an ARM will be
able to qualify for a larger loan since they are paying less interest. However,
because ARM interest rates fluctuate there is a level of uncertainty and risk
involved if economic conditions create long-term interest rate increases. ARM
interest rates are normally fixed for the first six months to a year, after
which they are pegged to some major economic index such as the T-bill rate.
For adjustable-rate mortgages there are two "caps" on interest rate increases.
The "period of adjustment" cap determines how much the interest rate is allowed
to vary from one period to the next. For example, if the agreed upon period is
every six months with a period of adjustment cap of 1%, then the maximum
interest rate increase over that six-month period could not exceed 1%. The
second cap puts a ceiling on how high the interest rate can increase over the
life of the loan. For example, the maximum increase might be negotiated to be
6%. This figure should be taken into account as the "worst-case scenario" when
considering this type of financing since the interest rate could possibly rise
by up to 6% from the initial rate. If you are sure that you could afford these
worst-case rates then you might consider this type of mortgage since you would
benefit if the rates went down.
Another feature which can sometimes add a level of comfort to this type of
mortgage is a conversion feature. Having a conversion clause in the mortgage
gives the homebuyer the option to lock in the interest rate at certain times
during the term of the mortgage. There is usually a conversion charge
associated with this option.
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| 2-Step
Mortgages |
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A 2-step mortgage is a combination of both fixed-rate
mortgages and adjustable-rate mortgages. Generally speaking, the first 5-7
years of the mortgage are treated like a fixed-rate mortgage. During the
remainder of the term, known as the second step, the interest rate is allowed
to fluctuate like an adjustable-rate mortgage.
During the initial first step of a 2-Step mortgage the interest rate is
generally lower than for a fixed rate mortgage but higher than for an
adjustable rate mortgage. The benefit of this type of mortgage is that it
initially offers the homebuyer a lower interest rate than those found in fixed
rate mortgages while still retaining the stability of a fixed payment and
interest rate for the first few years of the loan. The homebuyer still needs to
keep in mind that in the second step, or adjustable-rate portion of the
mortgage, the interest rate may move either up or down, depending on the
economy. As mentioned in the above section on Adjustable Rate Mortgages, a
mortgage conversion feature can sometimes add a cushion of security to this
type of mortgage.
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| Conforming & Non-conforming Mortgages
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A conforming mortgage refers to a mortgage that is
drawn up within the guidelines specified by the lending institutions referred
to as Fannie Mae and Freddie Mac. The most common reason for a mortgage to be
referred to as non-conforming is because the total amount of the mortgage
exceeds the lending limits or total loan amount allowed. This type of
non-conforming loan is often referred to as a Jumbo mortgage.
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| Baloon Mortgages |
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This type of mortgage is usually amortized over the
traditional 30-year period, but the actual length of the loan, or the term, is
much shorter. At the end of the term, the homeowner must renegotiate a new
mortgage at the new current interest rates. The amount still owning at the end
of a balloon mortgage term (that is the original loan amount less the payments
made against the principle during the term) is then due in full. The homeowner
will then have to obtain a new mortgage (either another balloon mortgage, or
switch to a fixed-rate or adjustable-rate mortgage) to replace the expired one.
The benefit of a balloon mortgage is that the interest rate is noticeably lower
than that for traditional 30-year fixed-rate mortgages.
Please note that homebuyers need to understand that :
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Once a balloon mortgage is due their next mortgage will be set at the new
current interest rates which could be higher or lower than before.
They may not have a guaranteed renewal privilege and may have to
go elsewhere to obtain a new mortgage.
They may have to financially re-qualify for the next mortgage.
Refinancing fees may be charged
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| Federal Housing Administration Mortgages
(FHAM) |
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These
are mortgages that are guaranteed against default by the Federal government.
Lenders are willing to give mortgages to homebuyers with smaller down payments
than under conventional financing because the Federal government guarantees the
loan against default. The homebuyer must pay an insurance premium for this
privilege and this cost is usually added to the mortgage. In order to qualify
for an FHAM the property in question must meet certain requirements. The
maximum amount of loan allowed under this system varies from region to region
and is based on the average price of housing in each area. You should contact
your REALTOR® or mortgage specialist for further information.
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| Veterans Administration Loans
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VA
loans are restricted to qualifying U.S. veterans for the purchase of a home
with no down payment and lowered closing costs.
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| Fannie Mae & Freddie Mac
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Both Fannie Mae and Freddie Mac are independent, privately run companies that
operate under special congressional charters. Their mandate is to ensure that
mortgage funds are made available to a broad spectrum of the American public.
They do this by buying mortgages from approved lenders and then packaging those
monies into securities backed by Fannie Mae/Freddie Mac. Those securities are
then sold to investors in the secondary mortgage market. Fannie Mae and Freddie
Mac are independently owned companies that compete with each other for mortgage
business. This competition ensures that there is an ample supply of low cost
mortgage money available to the American homebuyer.
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| Featured
Properties |
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$345,000
3 bed 3 bath
Henderson
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$342,000
4 bed 3 bath
Las Vegas
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$725,000
5 bed 4 bath
Las Vegas
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| Updated Date :
11/9/2005 7:00:00 AM |
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