MORTGAGE LOAN TYPES

There are many different types of mortgage loans, but they all belong to just two categories:  those mortgages that carry fixed interest rates and those that change interest rates at scheduled intervals during the term of the loan.

The following are descriptions of the most popular and common types of mortgages.  There are many more types of mortgage loans available for buyers.  Contact loan officers/brokers at mortgage companies or banks for more information.

Conventional - Fixed Rate Mortgage

A mortgage in which the interest rate remains the same throughout the entire term of the loan.  Fixed rate mortgages are usually available for terms of 15 to 30 years.  The major advantage of fixed rate mortgages is that they present predictable monthly payments for the life of the loan.

30 Year Fixed Rate Mortgage

This is the most common type of mortgage.  The monthly payment stays the same (except for taxes and insurance which will always go up over time).      Should the interest rates go way down after obtaining the loan, one can always refinance.

15 Year Fixed Rate Mortgage

This is the same as the above, except the loan is paid off sooner.  It allows homeowners to own their homes in half the time, but on the average, monthly payments will be 20 - 35% more every month than a 30 year mortgage.

Conventional - Adjustable Rate Mortgage (ARM)

A mortgage in which the interest rate can periodically adjust (go up or down) with changing market rates during the life of the loan.  The ARM allows a homeowner to take advantage of lower interest rates in a falling rate market and, therefore, benefit from lower monthly payments.  Initially, an ARM offers a lower interest rate, which is typically one to three percentage points lower than that of most fixed rate mortgages.  The initial fixed rate period is followed by adjustment intervals, such as every year, three years or ten years.  Common ARMs are:  1/1, 3/1, 5/1, 7/1 and 10/1.  A 3/1 ARM, for example, is fixed at an initial low rate for the first 3 years and then adjusts every year based on an index.  All ARMs have an annual cap, which means that they cannot increase more than that for the life of the loan.  Typically, the maximum that a rate can increase or decrease is 2% per adjustment period and 6% over the life of the loan.

FHA Loan

A mortgage that is insured by the Federal Housing Administration (FHA).  It is a federally backed mortgage loan that is often referred to as a government loan.   Insured by the government agency, the loan features either low or no down payment terms and includes 30 and 15 year fixed-rate mortgages as well as ARMs.  It is very popular with first time home buyers. FHA insured loan limit is $346,250.

Buyer Assistance Program

Free gift funds for down payment and closing costs are provided to qualified buyers with minimal or acceptable credit ratings and verifiable income.  The gift fund does not have to be repaid.  A big stumbling block for some middle-income home buyers is not having enough money for the down payment and closing costs; however, through buyer assistance programs, a contribution of up to 3% of the contract sales price is made by the seller after the closing from the proceeds of the sale.  One could be a first time home buyer or a repeat home buyer.

VA Loan

A mortgage guaranteed by the Department of Veterans Affairs (VA).  It is a federally backed mortgage loan designed for use only by qualified military veterans, active-duty servicemen, unmarried widows of veterans, or public health service officers.  No down payment is required for most VA loans below $240,000.  If a large down payment is made, VA considers loan amounts above $240,000.

Fannie Mae

A nickname for Federal National Mortgage Association (FNMA) and formerly a government agency.  It is now a congressionally chartered, private corporation that is the nation's largest supplier of home mortgage funds.  Fannie Mae provides local lenders with a supply of funds by purchasing blocks of VA, FHA, and also conventional loans.  Fannie Mae does not lend money directly to home buyers but makes sure that lenders do not run out of mortgage funds for low, moderate, and middle income Americans.  Fannie Mae looks at a number of factors such as credit ratings, employment history and debt ratio before approving a loan.

Freddie Mac

A nickname for Federal Home Loan Mortgage Corporation, it does not lend money directly to home buyers; rather, they buy mortgages from lenders and sell them as securities on the secondary mortgage market.  Like Fannie Mae, loans are approved by looking at a number of factors such as credit ratings, employment history and debt ratio.

Balloon Mortgage Loan

A mortgage loan that requires the remaining principal balance to be paid in full at a specific point in time.  A balloon mortgage has a fixed interest rate for seven or ten years followed by a "balloon" payment or a lump sum payment of the remaining balance at the end of the term.  The interest rate is generally lower than the fixed-rate mortgage and, therefore, the monthly payment is low and the monthly payments are amortized* over 30 years.

* Amortization is the repayment of a loan which consists of a portion that is applied to pay the accruing interest on a loan with the remainder being applied to the principal, and over time, the interest portion decreases as the loan balance decreases so that the amount applied to the principal increases and the mortgage is paid off at the end of a fixed time.

Jumbo Loan

A jumbo loan is for people who are in the luxury home market.  Presently, any mortgage with a loan amount of $322,700 or greater is considered as a jumbo loan.  It tends to have a higher interest rate (typically .5% to 1% higher), because lenders generally have a higher risk on these loans.  Also, a jumbo loan may require a higher down payment.

RAM

This is an option for older homeowners.  RAM stands for Reverse Annuity Mortgage.  For older Americans, particularly retirees living on fixed incomes, the equity in their homes (for homes that are either paid for or nearly paid for) is an asset that could supplement the homeowners' income.  A homeowner still has ownership of the home and a lender issues a RAM after appraising the home and makes the loan based on a percentage of the home's value.  Usually on a monthly basis, an annuity is paid to the homeowner by the lender to an amount equivalent to the equity the homeowner has in the home.

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