Given below are types of mortgage loans along with their description.
Fixed-Rate Mortgage
Fixed-Rate Mortgage is particular popular when interest rates are historically low. With a fixed-rate mortgage, borrowers get the security of knowing that their interest rate will stay the same all through the life of the loan.
In addition to protection against future increases in rates, it offers the certainty of knowing exactly how much interest will be paid.
A drawback is if market rates drop lower than the rate on the loan, payments will not drop correspondingly. Borrowers have to refinance in order to take advantage of lower interest rates.
Adjustable-Rate Mortgage
An adjustable-rate mortgage that is otherwise known an ARM, works just like the name implies. All through the term of the loan, the interest rate varies, adjusting up or down based on the index on which it is based. Monthly mortgage payments follow suit.
The rate adjusts annually or on a schedule that the lender and borrower agree to. In addition to the total increase over the life of the span, most ARMs have caps that limit the periodic increases.
The starting rate of an ARM is typically lower than the going market rate. This lets borrowers initially make use of lower rates and may be even qualify for a higher loan amount.
This lower rate comes with an assumption of risk of fluctuating, and potentially higher, future rates.
Government-backed Mortgages
FHA Loans
The Federal Housing Administration (FHA), which is part of the U.S. Dept. of Housing and Urban Development (HUD), administers various mortgage loan programs.
FHA loans have lower down payment requirements and are easier to qualify than conventional loans. FHA loans cannot exceed the statutory limit. Go to FHA Programs page to get more information.
VA loans
VA loans are guaranteed by U.S. Dept. of Veterans Affairs. The guaranty allows veterans and service persons to obtain home loans with favorable loan terms, usually without a down payment.
In addition, it is easier to qualify for a VA loan than a conventional loan. Lenders generally limit the maximum VA loan to $203,000.
The U.S. Department of Veterans Affairs does not make loans, it guarantees loans made by lenders. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a VA loan. VA-guaranteed loans are obtained by making application to private lending institutions.
Interest-Only Mortgages
What is commonly called an interest-only mortgage is really an interest-only option that works with various mortgage types.
This option has regular payments, typically monthly, for a fixed period of time; however, payments consist of one hundred percent interest. No principal is paid during the interest-only period.
When that period ends, the borrower is obligated to make payments of principal and interest. Because the time remaining in the loan term to repay the principal is shorter than it would have been, payments will adjust upward, sometimes substantially.
The appeal of interest-only payments is savings. When principal is not being paid, monthly payments are dramatically lower. On the risk side is potential for loss.
If the need to sell arises and the property value has stayed flat or declined, a borrower might be in a position where the mortgage loan balance is higher than the market value of the property.
Hybrid Mortgage
This mortgage combines features of both fixed-rate and adjustable-rate mortgages. A hybrid mortgage loan starts with a rate that is fixed for a period of time. When that fixed-rate period expires, the loan then converts to an ARM.
The initial rate for a hybrid mortgage loan is typically lower than prevailing fixed rates. The lower rate enables more buying power up front. On the risk side is the uncertainty of how high interest rates will be when the fixed-rate period expires.
Balloon Mortgage
A balloon mortgage generally has a short term, commonly anywhere from 3-7 years. During that term, borrowers make regular equal payments of principal - the amount of money borrowed - plus interest. At the end of the loan term, a "balloon" payment is due for the entire loan balance.
Options for handling the balloon payment include paying off the balance when due or refinancing before the payment comes due. Balloon mortgages are usually offered at lower interest rates than other fixed-rate loans.
In addition, payments are calculated using a period longer than the term of the loan. As a result, balloon loans offer affordability for short-term circumstances. Borrowers do need to plan ahead so they are not caught unprepared when the balloon payment is due.
Related Articles:
|
