Mortgages: The Basics
Mortgages: The Basics
In recent years, mortgage rates have been very favorable - and there are many options. Let's take a look at all of the choices in today's market - the two basics are fixed rate mortgage and adjustable rate mortgage (ARM).
Fixed rate mortgages:
- The monthly payment remains fixed for the life of the loan due a unchangeable interest rate.
- In the US, the term is usually for 10, 15, 20, or 30 years. Thirty years is the most common for first home buyers.
- It is easy to compare fixed rate mortgages from various lenders - as you can compare interest rates, monthly payments, fees, prepayment penalties, closing costs, etc.
Adjustable rate mortgages (ARM):
- ARMs may have initial low interest rates, sometimes only for the first year. Sometimes this rate is set artificially low as a way of creating an incentive for borrowers to borrow their money from a particular lender.
- Rates may be adjusted on a regular basis after the initial period.
- The interest rate may go up or down, impacting the monthly payment amount.
- Some ARMs have a cap on your payment or interest-rate increase period to period.
- All ARMs must put a ceiling on rate increases over the life of the loan.
- Adjustable rate mortgages carry risks when interest rates are going up.
- The initial interest rate ranges 0.5%-2.0% lower than the average 30-year fixed rate.
Loans amounts are in two categories - conventional and jumbo loans. Reviewed annually, the 2004 conventional first mortgage loan limit is under $333,700; a jumbo is for all loans over that amount. Jumbo loans are not funded by Fannie Mae and Freddie Mac and usually carry a higher interest rate and some additional underwriting requirements.
In addition to common loan structures such as fixed rate, adjustable rate and balloon loans, Fannie Mae and Freddie Mac also have mortgages for low to no down payments, community lending and affordable housing initiatives, construction to permanent, home improvement and reverse mortgages.
There are a variety of other mortgages, including:
- Blanket Loan: More than one property offered as collateral.
- Hard Money Loan (a type of non-bankable loan): Generally the lender approves the loan based upon the value of the and the equity assets. Hard money loans are usually at a higher interest rate.
- Interest-only Loan: You pay only the interest in monthly payments for a fixed term, generally 5-7 years. At that point, the options are to refinance, pay the balance, or start paying off the principal.
- Package Loan: Finance the purchase of both real property and personal property; i.e.. a new home and major appliances.
- Reverse Mortgage: This type of loan is designed to allow the borrower to receive money from the lender in monthly installments, using your house as collateral. You remain the owner of your home, responsible for paying property taxes, insurance, maintenance and repairs, etc. At the end of the loan, you (or your heirs) repay the cash advances plus interest. This type of loan is a popular way to generate monthly cash flow for seniors that are also homeowners.
- Wraparound Mortgage (all-inclusive trust deed): A buyer can purchase property without qualifying for a loan or incurring closing costs. A new, second mortgage is added to the first mortgage, and the new mortgage includes the unpaid balance of first.
