 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. |
