| Contents:
Fixed-Rate Mortgages
Adjustable-Rate Mortgages
2-Step Mortgages
Conforming & Non-Conforming Mortgages
Balloon Mortgages
(FHA) Federal Housing Administration Mortgages
(VA) U.S. Department of Veteran Affairs
Fannie Mae and Freddie Mac
|
| Fixed-Rate
Mortgages |
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 remain 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 |
With adjustable-rate mortgages 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 |
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 |
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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| Balloon
Mortgages |
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...
- 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) |
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 (VA) |
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 and Freddie Mac |
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. |