 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.
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They may not have a guaranteed renewal
privilege and may have to go elsewhere to obtain a new mortgage.
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They may have to financially re-qualify
for the next mortgage.
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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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