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Mortgage |
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Mortgage |
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Mortgage Loan Types
Choosing the right mortgage can be confusing. With so many variables to consider the average person gets easily overwhelmed. The goal of this page is that you don't.
Spend some time examining your options:
* Fixed-rate mortgage
The most popular type of mortgage. It has a fixed interest rate and monthly payment that extend over the life of the loan. This type of mortgage is appealing to many buyers in the US because it brings certainty to their monthly budgets. The drawback of this mortgage is that payments don't drop when interest rates do.The most popular fixed-rate mortgages run 15 and 30 years. However, many lenders will also grant 20 and 40 year mortgage terms as well.
* Adjustable-rate mortgage (ARM)
This mortgage is popular with buyers in the US who like to take risks. The interest rates on ARMs change periodically. If interest rates go up, so do your monthly mortgage payments. On the flip side, if interest rates drop, you save money with lower payments. ARMs fall into two general categories, with many variations:
1. One-year ARM's adjust their rate annually.
2. The second type adjusts according to a schedule agreed upon by you and your lender. A 3/1 ARM, for example, gives you a fixed interest rate for three years and an annual adjustment thereafter.
Adjustable-rate mortgage terms usually run for one, three, five, seven or 10 years. Most ARMs have caps that limit increases to a certain amount, usually 2 percent at each adjustment and 6 percent over the life of the loan.
* Graduated-payment mortgage
This is a popular option with buyers in the US who expect their incomes to rise. Basically, a percentage of interest is delayed and added onto the principal. The disadvantage is that the loan balance increases, rather than decreases, for the first few years. Monthly payments start out low then increase each year by about 5 percent to 7.5 percent, until they include all the interest due with each payment.
* Graduated-equity mortgage
This option is popular with buyers in the US who want to quickly attain home equity. Payment starts at a typical rate, but increases each month according to a graduated payment schedule set up by the borrower and lender. The increased payments reduce the principal, thus shortening the loan's term and cutting your interest.
* Shared-appreciation mortgage
For buyers in the US who want to sell their homes within 5 years, this may be a good option. A lower interest rate is obtained in exchange for sharing the home's appreciation with the lender. When the house is sold, or five years later-whichever comes first-you must split up to 50 percent of the increased value with your bank. For example, if the value of a $125,000 home increases to $175,000 in five years, the homeowner will owe the bank half of the $50,000 appreciation. Keep in mind that the appreciation is based on market value, not the amount for which you sell your home. If you sell below market value, you will still be obligated to pay a percentage of market appreciation. |
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* Balloon mortgage
Lenders don't generally offer balloon mortgages on homes, but buyers can sometimes obtain one from a home owner willing to finance the house personally. Balloon mortgages require the buyer to pay interest only for a set period of time, usually three to five years, after which the principal comes due all at once. For example, assume you're buying a $100,000 house from an owner willing to finance the sale personally at 8% interest with a 15% downpayment over five years. You will pay $15,000 down to the owner at closing as well as other associated costs. That leaves you with a $15,000 equity in the house, and a debt to the owner of $85,000 remaining to be paid. The ultimate risk with a balloon mortgage is that you will be unable to pay off the balloon or get refinancing at the end of the term, in which case you could lose your home, and all the money you've paid to the owner up to that point.
* Other types
By paying biweekly you can save interest and build equity more quickly than you could with monthly payments. Essentially you are making 13 monthly payments each year. The result is that you could pay a 30-year mortgage in approximately 22 years. A no-doc/low-doc mortgage requires a downpayment of 25 percent or more and comes with a higher interest rate. But the lender runs no income verification. This type of mortgage is generally recommended if you want to expedite the process, you don't have a steady income, or you are self-employed. Reverse mortgages appeal to older borrowers who own their own home and want to cash in on its equity. The lender sends the homeowner a payment each month and the homeowner lives in the house for the remainder of his or her life. Upon the homeowner's death, the estate must repay the money with interest. Typically, the home is sold to pay the loan. |
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