Various Types Of Mortgage Loans
Interest rates and the length of repayment, or term
, constitute the major differences between mortgage products. Mortgage agreements can carry fixed interest rates, variable or adjustable interest rates, or offer options of both. This helpful overview outlines the most common mortgage loan options.Fixed Rate Mortgages
Fixed rate mortgages are the old fashioned loans that everybodys parents and grandparents had. They carry one interest rate the whole life of the loan. The loan is usually issued in 15 or 30 year terms, although some banks offer 20, 25, and even 40 year products. The length of the term determines how much interest a buyer will pay over the course of repayment a longer term loan means more interest paid by the homebuyer.
The advantage to the buyer is that when the market fluctuates and the national average is above his fixed interest rate, he stays locked into the lower rate. The disadvantage is comes when the national average fluctuates below the buyers fixed rate and he is locked into the higher rate.
One special type of fixed rate mortgage is called a biweekly mortgage, for which a homeowner splits their monthly payment into two equal installments paid every two weeks. Because there are 52 weeks in a year and payments are made every two weeks, 26 installments are made, which means 13 monthly payments are being made in 12 months. While this may place a financial strain on some homeowners, for others who can afford making three payments some months, this is a good option that allows them to pay off their debt sooner and pay less interest in the end.
Adjustable Rate Mortgages
Adjustable rate mortgages (ARMs) tend to clock in a little lower than fixed rate mortgages, but come with the risk of inflated rates down the road due to fluctuations in the market and national economy. These offer buyers the ability to purchase a home with lower initial monthly payments. However, should the market fluctuate, a homeowner with an ARM needs to be financially prepared to take on heftier payments.
An ARM is composed of an initial interest rate, up to three points lower than the average fixed interest rate; an index, which is a lenders measurement of the difference between their investment in your home and other investments; and a margin, or the amount the lender adds to the index to determine the adjusted rate, typically between 1.5 to 2.5 percent.
The final component of an ARM, determined at the time of signing, is the interval, or how often the interest rate, and therefore, the payments schedule, is to be adjusted.
Some ARMs come with built-in protections, such as caps on rates, typically about 5 percentage points and no more than 2 percent per year; as well as caps on monthly payments which limit how much monthly payments may be increased at adjustment time. Monthly payment caps can, however, lead to a lengthening of the term and/or a de-amortization of the equity, resulting in more money paid in interest.
Mortgages That Are Both
Convertible mortgages options are the most spacious options for homebuyers in an unsteady market, offering a window of opportunity to change from a fixed rate to an ARM or vice versa.
A convertible fixed rate mortgage, sometimes referred to as a Reducing Interest Loan or Mortgage (RIL or RIM) or as a Reduction Option Loan (ROL), is a fixed rate mortgage that offers buyers the option to adjust the rate of the loan between the second and the fifth year of the loan term by adding an extra quarter to three-eighths of a percent to the mortgages established interest rate and paying an additional quarter to three-eighths of a percentage point at the time of closing.
A convertible ARM allows homebuyers to convert their ARM to a fixed rate 15 or 30 year loan usually between the second and fifth year of the term for a fee of about $250 and approximately 1% of the loan.
Loans with conversion options allow homeowners to capitalize on lowered rates with without having to pay lofty refinancing fees.
In a Lender Buydown, the buyer initially assumes a lower than average interest rate that increases in fixed intervals once a year for three years, whereupon the rate remains fixed for the remainder of the term. The final fixed rate is usually slightly higher than the average fixed rate at the time the loan is signed.
A Compressed Buydown works the same way but carries adjustments in six-month intervals.
Some newer loan products, called Two-Step, Super Seven, or Premier Mortgages, offer buyers reduced fix rates for a set period of time, from 2 to 10 years, after which time the rate is either adjusted once, according to market conditions, or remains adjustable, both for the duration of the term.
Other Mortgage Options
Special mortgage packages are available to qualified buyers through the Federal Housing Authority and the Veterans authority.
Also, financing in which the seller underwrites a portion of the loan is called a Seller Assisted or Creative Mortgage.
Lastly, current homeowners may refinance their present mortgage, take out a loan against the equity in the house at a percentage interest, or take out a reverse mortgage, which provides owners with a monthly annuity, totaling the equity in the home, which is tax-free and also allows them to keep ownership of the home.
Before you decide which mortgage option is right for you, its important to conduct some research, carefully evaluate your current financial situation and even consult with an experienced financial advisor.
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