Mortgage Options
A wide variety of mortgage options are on the market
today. Below is a summary of the most common types of mortgages.
First Time Home Buyer - Click here to view the First Time Home Buyer's Guide.
Fixed Rate Mortgage - The traditional fixed rate mortgage has a fixed monthly payment and interest rate that never changes throughout the life of the loan. If interest rates rise, it will not affect your monthly payment. This option is generally a good choice if you do not plan to move or refinance for at least seven years. Fixed rate loans are slightly more expensive than their adjustable rate counterpart. However, fixed rates are not substantially more expensive than adjustable rates when interest rates are low, and may be the better option in the long run, as you lock into the low interest rate. It may be harder to qualify for a fixed rate loan than with an adjustable rate.
30 Year Fixed - The 30 year fixed loan is the most common fixed loan term. A constant monthly payment and interest rate are locked in for the 30 year term. The 30 year fixed rate will be higher than a 15 year fixed rate.
15 Year Fixed - The 15 year fixed rate gives you ownership in half the time of a 30 year fixed, with a lower interest rate. Of course, the monthly payment amount will be substantially higher than with the 30 year loan.
Some home buyers choose a 30 year fixed loan, but voluntarily make higher monthly payments to pay off their home in 15 years. This option can leave a safety net for unexpected expenses without committing to paying the higher monthly payment. This approach has just a slightly higher interest rate than committing to a 15 year fixed mortgage.
Adjustable Rate Mortgage (ARM) - The adjustable, or variable rate loan features monthly payments that rise or fall with interest rates. If interest rates decrease, you will pay less, but if interest rates rise, you will pay more. If rates rise substantially, you may pay much more than with a fixed rate mortgage. If interest rates stay flat throughout the life of the loan, an adjustable rate mortgage has a slightly lower interest rate than a fixed rate mortgage.
Hybrid ARM - The majority of today’s adjustable rate mortgages include a fixed rate component for a set time period ranging from 6 months to 10 years. For the initial fixed rate stage, the monthly payments and interest rate are fixed. Common ‘fixed rate periods’ are 3, 5 and 7 years. After the fixed period ends, the rate adjusts to current interest rates.
3/1 ARM, 5/1 ARM, 7/1 ARM - A 3/1 ARM has a fixed monthly payment and interest rates for 3 years, then turns into an adjustable rate loan for the last 27 years. A 5/1 ARM has a 5 year fixed term and 25 year adjustable term, and a 7/1 ARM has a 7 year fixed term, and a 23 year adjustable term.
Other Options - Here are some of the most common other options.
Jumbo Loan - The 'conforming loan' limit is set every January. This is the highest loan amount that is eligible for purchase by Freddie Mac or Fannie Mae. Loans higher than this amount are called 'non-conforming loans' or 'jumbo loans.' These loans carry a higher interest rate. The January 2006 conforming loan limit for single family homes or condominiums is $417,000.
80/20 Loan - This option allows the borrower to get a loan with no money down, which is considered 100% financing. The main advantage to an 80/20 loan is avoiding Private Mortgage Insurance (PMI/MI). Almost all lenders require Mortgage Insurance to be paid if the principle amount of your first mortgage is greater that 80% loan to value (LTV).
Negative Amortization Loan - The negative amortization loan provides more flexibility for the monthly income that varies (commissions, tips, bonuses). There is a 'minimum monthly payment' amount and a 'full monthly payment' amount. If the borrower pays the minimum amount, the unpaid interest for that month is added to the amount of the loan. Pay the minimum amount, the full amount, or more based on that month's cash flow.
Reverse Mortgage - As the name implies, a reverse mortgage is the opposite of an ordinary mortgage. In return for placing a mortgage on the equity in her home, the homeowner receives a monthly payment (or in some cases a lump sum) from the bank. The home is used as a security against the loan. Since the payment is a loan payment, it is tax-free when the homeowner receives it. With a reverse mortgage, the homeowner generally makes no payments until she moves, the property is sold, or she passes away. Senior homeowners often use a reverse mortgage to convert home equity into cash.
Conforming v Non-Conforming Loan - See the 'Jumbo Loan' section above.
