Most buyers will need a mortgage to
finance their new property. A mortgage is a legal document that
pledges a property to the lender as security for payment of a
debt. There are different types of mortgages and I will try to give
you as much information as I can. However, you should speak to a
or mortgage company in your area if you are familiar with one.
Hopefully this site will give you enough information to help you
understand the whole process and to help you make the right decision
on the type of mortgage you procure.
The Two Basic Types of
Mortgages and some variations
Fixed Rate Mortgage - this is the loan that
most people think of when considering a mortgage. You will owe a
certain percentage of the loan as interest to the lender. This
amount never changes and your monthly payment will remain the same
over the life of the loan. Fixed-rate mortgages are usually for 15
or 30 years although today there are some that go as long as 40
Variable Rate Mortgage - with this
mortgage, the interest rate fluctuates with the current cost of
money thus making the mortgage subject to adjustment if the
prevailing rate moves up or down
ARM - This is an
adjustable-rate mortgage. The interest rate changes to reflect
changes in the credit market throughout the world.
The first year rate, otherwise known as the teaser
rate, is generally a couple of percentage points below the market
rate. There are also upward limits, above which the interest rate
isn't allowed to go. This is called the
If your teaser rate is 3%, and you have a five point cap, then the
highest that your interest rate can go is 8%.
Also, the amount that the interest rate can rise
each year is limited, usually to one or two percentage points per
year. The frequency at which the rate adjusts might vary and make
sure you know these features.
If you do consider an ARM, think about the worst
case scenario. What if interest rates go up and your ARM adjusts to
its maximum. What will that maximum be and when will it kick in?
Will you be able to afford these payments?
Convertible ARM - this is an adjustable
rate mortgage that allows the borrower to change the ARM to a fixed
rate mortgage within a specific time
Two Step Mortgage - an adjustable rate
mortgage (ARM) that has one interest rate for the first five or
seven years of its mortgage term and a different interest rate for
the remainder of the
Other Types of Mortgages
There is a variation to the loans above that has
some of the same aspects called a Balloon Loan - these tend
to be short term loans. You borrow money for say, three to seven
years, and the loan is amortized as though it were a 30 year loan.
At the end of the three or seven year period, you owe the bank all
of the remaining principal in one lump sum - like a big
balloon.....thus its name. Again, these loans tend to have lower
interest rates than the standard 30 year mortgage. If you're not
planning to stay too long in your house, you might be interested in
such a long because you pay less in interest over the life of the
loan than you would with a 30 year fixed loan, saving potentially
thousand of dollars. So you're less out of pocket when it comes time
Keep in mind that if for some reason your plans
change and you want to stay in the house, you're going to have to
pay off the loan in full - by getting another loan, at the
prevailing interest rates and with the attendant costs of getting
that new loan.
Regardless of what type of mortgage you're
interested in, you also need to figure out where you'll get it from
- a bank or mortgage broker.
Assumable Mortgage - this is a mortgage
that can be assumed by the buyer when a hold is sold. Usually the
borrower must "qualify" in order to assume the loan.
Biweekly Mortgage - this is a mortgage in
which you make payments every two weeks instead of once a month. The
basic result is that instead of making twelve monthly payments
during the year, you make thirteen. The extra payment reduces the
reducing the time it takes to pay off a thirty year mortgage.
Conventional Mortgage - refers to home
loans other than government loans (VA and FHA)
FHA Mortgage - this type is insured by the
Federal Housing Administration (FHA). Along with VA loans, an FHA
loan will often be referred to as a government loan
VA Loan - this loan is guaranteed by the
Veteran's Administration insuring payment in case of a default by
the borrower. This type is available to qualified veterans
Home Equity Conversion Mortgage (HECM) -
usually referred to as a reverse annuity mortgage, what makes this
type of mortgage unique is that instead of making payments to a
lender, the lender makes payments to you. It enables older home
owners to convert the equity they have in their homes into cash,
usually in the form of monthly payments. Unlike traditional home
equity loans, a borrower does not qualify on the basis of income but
on the value of his or her home. In addition, the loan does not have
to be repaid until the borrower no longer occupies the property
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