All mortgage plans can be divided into categories in two different ways

A) Conventional and government loans.

B) All the various mortgage programs may be classified as fixed rate loans, adjustable rate loans and their combinations.

 

A) Conventional and Government Loans

Any 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
VA loans are guaranteed by U.S. Dept. of Veterans Affairs. The guarantee 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. 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 filing applications to private lending institutions.

RHS Loan Programs
The Rural Housing Service (RHS), of the U.S. Dept. of Agriculture, guarantees loans for rural residents with minimal closing costs and no down payment. Ask our loan officer for details.

Ginnie Mae which is part of HUD guarantees securities backed by pools of mortgage loans insured by these three federal agencies - FHA, VA, or RHS. Securities are sold through financial institutions that trade government securities.

Conforming Loans
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, package 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 result 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 announce new loan limits every year.

Jumbo Loans
Loans 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 slightly higher interest rate than conforming, but the spread between the two varies with the economy.

If you are looking for a jumbo loan and need more information or advice, we invite you to talk to our specialist.

B/C Loans
Loans 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.

B) Fixed Rate Mortgages

With fixed rate mortgage (FRM) loans the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 40, 30, 25, 20, 15 and 10 years. Generally, the shorter the term of a loan, the lower the interest rate you could get.

The 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 fast and save more than half the total interest costs of a 30-year loan.

The 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.

With a bi-weekly 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.

Balloon loans
Balloon 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. They mostly have terms of 3, 5, and 7 years.

The advantage of this type of loan is that the interest rate on balloon loans is generally lower than 30 and 15 year mortgages, which hold lower monthly payments. The disadvantage is at the end of the term, because you will have to come up with a lump sum to pay off your lender, either through a refinance or from your own savings.

Balloon loans with refinancing options 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 do not need to qualify, nor must the property be approved for a second time. The interest rate on the new loan is the 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.

Adjustable Rate Mortgages
Variable or adjustable loan is a loan whose interest rate, and the accompanied monthly payments, fluctuates 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.

The margin is a fixed percentage of points added to the index to compute the interest rate. The result will then be rounded to the nearest one-eighth of a percent.

Most ARM loans have an interest rate cap 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.

Negative amortizing loans
Some types of ARM loans (for example, option ARM loans) 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. For example: if the interest rates rise to the point that where 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 amount due.

The advantage of negative 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 the loan procedures.

With most ARM loans, the interest rate can adjust every month, every three or six months, once a year, every three years, or every five years. The interest rate on negative 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, the loan is called a 1-year ARM, and so on. Most 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 “teaser rate”.

All ARMs are available with 30-year terms and some with 15 or 40 year terms.

Adjustable rate mortgages generally have a lower initial interest rate than fixed rate loans.

Option ARM Loans
One of the most creative products that don’t require a set payment each month is the option ARM. After the first payment, you get four payment options to choose from each month: your lender sends you a monthly statement offering a (1) minimum payment, (2) interest-only payment (2), (3) 30-year amortized payment or (4) 15-year amortized payment.

Combined (Hybrid) Loans
Hybrid loans, a combination of fixed and ARM loans come in different varieties:

Fixed-period ARMs
With fixed-period ARM loans, homeowners can enjoy from three to ten years of fixed payments before the initial interest rate changes. 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. Adjustable Rate Mortgages with an initial fixed period typically have “first adjustment caps” that provide a maximum amount the rate can reach; these loans will differ, but not eliminate lifetime and adjustment caps. It limits the interest rate you will pay the first time your rate is adjusted. First adjustment caps vary with the type of loan program.

The advantage of these loans is that the interest rate is lower than that of a 30-year fixed loan (the lender is not locked in for as long so their risk is lower and they can charge less), but you still get the advantage of a fixed rate for a period of time.

Two-Step Mortgage
Two-Step 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.

Convertible ARMs
Some 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 mortgages.

The 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 time.

The 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 convertible loan.

Buydown Mortgage
A 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 houses 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. In order 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 slightly higher interest rate.

With so many mortgage plans available you must consider how much time you will be staying in the home, the amount you would like to apply towards monthly payments, other costs involved to close the transaction, the interest rates, and does the loan have a prepayment penalty?

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