mortgage plans can be divided into categories. Conventional and
government loans. Secondly, all the various mortgage programs
may be classified as fixed rate loans or adjustable rate loans.
and Government Loans
mortgage loan other than an FHA, VA or an RHS loan is a conventional
one. 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.
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.
which is part of HUD guarantees securities backed by pools of
mortgage loans insured by these three federal agencies - FHA,
or VA, or RHS. Securities are sold through financial institutions
that trade government securities.
Conventional loans may be conforming and non-conforming. Conforming
loans have terms and conditions that follow the guidelines set
forth by Fannie Mae and Freddie Mac. These two stockholder-owned
corporations purchase mortgage loans complying with the guidelines
from mortgage lending institutions, packages the mortgages into
securities and sell the securities to investors. By doing so,
Fannie Mae and Freddie Mac, like Ginnie Mae, provide a continuous
flow of affordable funds for home financing that results in the
availability of mortgage credit for Americans. Fannie Mae and
Freddie Mac guidelines establish the maximum loan amount, borrower
credit and income requirements, down payment, and suitable properties.
Fannie Mae and Freddie Mac announces new loan limits every year.
above the maximum loan amount established by Fannie Mae and Freddie
Mac are known as 'jumbo' loans. Because jumbo loans are bought
and sold on a much smaller scale, they often have a little higher
interest rate than conforming, but the spread between the two
varies with the economy.
that do not meet the borrower credit requirements of Fannie Mae
and Freddie Mac are called 'B','C' and 'D' paper loans vs. 'A'
paper conforming loans. B/C loans are offered to borrowers
that may have recently filed for bankruptcy, foreclosure, or have
had late payments on their credit reports. Their purpose is to
offer temporary financing to these applicants until they can qualify
for conforming "A" financing. The interest rates and programs
vary, based upon many factors of the borrower's financial situation
and credit history.
fixed rate mortgage (FRM)loan the interest rate and your mortgage
monthly payments remain fixed for the period of the loan. Fixed-rate
mortgages are available for 30, 25, 20, 15 years and 10 years.
Generally, the shorter the term of a loan, the lower the interest
rate you could get.
most popular mortgage terms are 30 and 15 years. With the traditional
30-year fixed rate mortgage your monthly payments are lower than
they would be on a shorter term loan. But if you can afford higher
monthly payments a 15-year fixed-rate mortgage allows you to repay
your loan twice as faster and save more than half the total interest
costs of a 30-year loan.
payments on fixed rate fully amortizing loans are calculated so
that at the end of the term the mortgage loan is paid in full.
During the early amortization period, a large percentage of the
monthly payment is used for paying the interest. As the loan is
paid down, more of the monthly payment is applied to principal.
biweekly mortgage plan you pay half of the monthly mortgage payment
every 2 weeks. It allows you to repay a loan much faster. For
example, a 30 year loan can be paid off within 18 to 19 years.
loans are short-term fixed rate loans that have fixed monthly
payments based usually upon a 30-year fully amortizing schedule
and a lump sum payment at the end of its term. Usually they have
terms of 3, 5, and 7 years.
advantage of this type of loan is that the interest rate on balloon
loans is generally lower than 30- and 15- year mortgages resulting
in lower monthly payments. The disadvantage is that at the end
of the term you will have to come up with a lump sum to pay off
your lender, either through a refinance or from your own savings.
loans with refinancing option allow borrowers to convert the mortgage
at the end of the balloon period to a fixed rate loan -- based
upon the outstanding principal balance -- if certain conditions
are met. If you refinance the loan at maturity you need not be
requalified, nor the property reapproved. The interest rate on
the new loan is a current rate at the time of conversion. There
might be a minimal processing fee to obtain the new loan. The
most popular terms are 5/25 Balloon, and 7/23 Balloon.
or adjustable loan is loan whose interest rate, and accordingly
monthly payments, fluctuate over the period of the loan. With
this type of mortgage, periodic adjustments based on changes in
a defined index are made to the interest rate. The index for your
particular loan is established at the time of application.
margin is fixed percentage points added to the index to compute
the interest rate. The
margins remain fixed for the term of the loan and are not impacted
by the financial markets and movement of interest rates. Lenders
use a variety of margins depending upon the loan program and adjustment
ARMs have an interest rate caps to protect you from enormous increases
in monthly payments. A lifetime cap limits the interest rate increase
over the life of the loan. A periodic or adjustment cap limits
how much your interest rate can rise at one time. Your
mortgage disclosure will tell you the exact index, to be used,
whether the weekly or monthly value applies, the lead time for
your index, the margin, and any caps.
types of ARMs offer payment caps rather than interest rate caps,
which limit the amount the monthly payment can increase. If a
loan has payment cap but has no periodic interest rate cap, then
the loan may become negatively amortized: if the interest rates
rise to the point that the monthly mortgage payment does not cover
the interest due, any unpaid interest will get added to the loan
balance, so the loan balance increases. However, you always have
the option to pay the minimum monthly payment, or the fully amortized
advantage of negatively amortizing loans is that you can control
cash flow (relatively stable payment), take advantage of low interest
rates relative to the market at any given time, and pay back the
money borrowed today at a depreciated value years from now (because
of natural inflation). This makes such loans a great tool for
homeowners as long as you understand the mechanics of what's going
most ARMs, the interest rate can adjust every six months, once
a year, every three years, or every five years. The interest rate
on negatively amortized loans can adjust monthly. A loan
with an adjustment period of 6 months is called a 6-month ARM,
with an adjustment period of 1 year is called a 1-year ARM, and
ARMs offer an initial lower interest rate than the fully indexed
rate (index plus margin) during the initial period of the loan,
which could be one month or a year or more. It is also known as
ARMs are available with 30-year terms and some with 15-year terms.
Adjustable rate mortgages generally have a lower initial interest
rate than fixed rate loans.
fixed-period ARMs homeowners can enjoy from three to ten years
of fixed payments before the initial interest rate change. At
the end of the fixed period, the interest rate will adjust annually.
Fixed-period ARMs -- 30/3/1, 30/5/1, 30/7/1 and 30/10/1 -- are
generally tied to the one-year Treasury securities index. ARMs
with an initial fixed period beside of lifetime and adjustment
caps usually have also first adjustment cap. It limits the interest
rate you will pay the first time your rate is adjusted. First
adjustment caps vary with type of loan program.
mortgages have a fixed rate for a certain time, most often 5 or
7 years, and then interest rate changes to a current market rate.
After that adjustment the mortgage maintains new fixed rate for
the remaining 23 or 25 years.
ARMs come with option to convert them to a fixed-rate mortgage
at designated times (usually during the first five years on the
adjustment date), if you see interest rates starting to rise.
The new rate is established at the current market rate for fixed-rate
conversion is typically done for a nominal fee and requires almost
no paperwork. The disadvantage is that the conversion interest
rate is typically a little higher than the market rate at that
other kind of convertible mortgage is a fixed rate loan with rate
reduction option. If rates had dropped since the time of closing
it allows you, under some prescribed conditions, for a small conversion
fee to adjust your mortgage to going market rate. Generally the
interest rate or discount points may be a little higher for a
Payment Mortgages (GPMs)
payment mortgages have payments that start low and gradually increase
at predetermined times. A lower initial payments allow you to
qualify for a larger loan amount. The monthly payments will eventually
be higher in order to catch up from the lower payments. In fact,
your loan will be negatively amortizing during the early years
of the loan, then pay off the principal at an accelerated pace
through the later years.
offer different GPM payment plans, which vary in the rate of payment
increases and the number of years over which the payments will
increase. The greater the rate of increase or the longer the period
of increase, the lower the mortgage payments in the early years.
temporary buydown is the type of loan with an initially discounted
interest rate which gradually increases to an agreed-upon fixed
rate usually within one to three years. An initially discounted
rate allows you to qualify for more house with the same
income and gives you the advantage of lower initial monthly payments
for the first years of the loan when extra money may be needed
for furnishings or home improvements. To reduce your monthly
payments during the first few years of a mortgage you make an
initial lump sum payment to the lender. If you do not have
the cash to pay for the buydown, the lender can pay this fee if
you agree on a little higher interest rate. The
lower rate may apply for the full duration of the loan or for
just the first few years. A buydown may be used to qualify a borrower
who would otherwise not qualify . This is because a buydown results
in lower payments which are easier to qualify for.
a variety of different loan programs available, it is important
to choose the type of loan that will best suit your needs.
right type of mortgage chiefly depends on how long you plan on
staying in the house and the amount of monthly payment you can
you don't plan to stay in your house for at least 5 to 7 years,
it will be reasonable to consider an Adjustable Rate Mortgage,
Balloon Mortgage or Two-Step Mortgage. ARMs traditionally offer
lower interest rates during the early years of the loan than fixed-rate
loans. A Two-Step Mortgage will give you a lower interest rate
than a 30-year mortgage for the first five or seven years. A Balloon
Mortgage offers lower interest rates for shorter term financing,
usually five or seven years. Because of a lower interest rate
it is easy to qualify for these type of mortgages. However don't
accept the ARM unless you can afford the maximum possible monthly
you can start to consider 15 or 30 year fixed rate mortgages if
you plan to stay in your home for more than seven years.
Mortgage Lenders Marketing Services