Thursday, May 14, 2009

Are You Aware of These Types of Mortgage Loans?

Mortgages can be categorized into various types in two different ways. To start with mortgages can be based on loan provider. As such there are two divisions - government and conventional loans. Second categorization is made based on type of interest rate - fixed or adjustable rate & their combinations.

a) Loan Provider

Government loans are like FHA and VA loans, Rural Housing Service Loan Programs and State & Local Housing Programs.

  • FHA Loans: Federal Housing Administration administers many loan programs and these are easier to qualify for compared to conventional loans. They have lower down payment requirements but have statutory limits, meaning the loan amount cannot be more than the set limit.

  • VA Loans: These are guaranteed by U.S. Dept. of Veterans Affairs. The veterans & service persons are able to get mortgage loans with suitable terms and usually without down payment requirement because of the VA guaranty.

  • RHS Loans: Rural Housing Service guarantees mortgages for rural residents without requirement of any down payment and minimal closing costs.

  • State & Local Housing Programs: In many states low to moderate housing finance programs, programs which are modeled specifically for first time buyers & down payment assistance programs are made available for borrowers. The advantage borrowers get is that these programs have lenient qualification guidelines & lower upfront fees.

Convention loans

These loans are further divided into two types; conforming and non-conforming.

Conforming loans have terms & conditions as set by Fannie Mae & Freddie Mac while non-conforming loans also called B/C loans are for borrowers who do not meet the credit requirements set by Fannie Mae & Freddie Mac. These loans are offered to borrowers who may have recently filed bankruptcy, had gone through foreclosure or have late payments on credit report.

b) Type of interest rate

Fixed rate mortgages

Fixed rate mortgage have fixed interest rates and monthly payments on the loan remain fixed for the full term of the loan. These loans are available for terms which can be 40, 30, 25, 20, 15 and 10 years.

Payments on these type of loans are calculated in a way that when the term of the loan ends the mortgage will get paid off in full and is also called as fully amortizing loan.

Adjustable Rate Mortgages

For adjustable/variable rate loans the interest rate as well as monthly payments change over the term of the loan. The interest rate adjusts according to changes that occur on an index on which the interest rate is based.

Hybrid Loans

These loans are combination of adjustable and fixed rate mortgages and have different variations:

  • Fixed period ARMs

  • Two-Step Mortgages

  • Convertible ARMs

  • Graduated Payment Mortgages

  • Buydown Mortgages

With so many loan options selecting the right type can become difficult. The right type mainly depends on how long a person plans on staying in the house & amount of monthly payments he can comfortably afford.

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