Know Your Mortgage Options

MORTGAGE TYPE INTEREST RATE MATURITY PAYMENTS
Conventional Fixed Fixed 15, 20, 25, 30 years Fixed over term of the loan
Adjustable Rate or Adjustable Mortgage Loan (ARM or AML) Interest rate is pegged to a rate over which the lender has no control. For example, the weekly average yield on U.S. Government securities, adjusted to a constant maturity of 1, 3, or 5 years. Starting rate may be lower than on conventional rate because borrower shares risk of rising rates with lender. Fixed, but sometimes can be extended in lieu of increase in monthly payment when interest rate rises. May change when interest rate changes or only a specified intervals, such as annually or every 30 to 5 years. If payments do not increase with interest rates, result may be negative amortization (see GPM below), or an extension of the maturity.
  These mortgages may take many forms. To protect yourself, shop around for favorable terms, including limits on the increase in rate permitted in any one year and over the whole term, and limits on payment increases and negative amortization.
Graduated Payment (GPM) Fixed Fixed Low at start, increase gradually as predetermined during first 5 or 10 years, then level out.
  Because of lower starting payment, may appeal to young borrowers who anticipate increased income in future years. CAUTION: early payments may not cover interest due. Unpaid interest is added to outstanding principal, increasing the debt. This is called NEGATIVE AMORTIZATION, and borrowers may get a shock if they decide to sell in a few years and discover reduced equity in the property. However, some GPMs may include arrangements to prevent negative amortization.
Graduated Payment Adjustable Adjustable as in ARM or AML Fixed, usually up to 30 years Similar to GPM. During first 10 years may be less than required to fully amortize loan. Adjusted within that period and every five years thereafter to insure full payment.
  Federal savings and loan and mutual savings banks were authorized in July 1981 to offer this mortgage which combines graduated payments with adjustable interest rates. Payment adjustments may be quite large because of these two areas of change.
Renegotiable Rate (RRM) Fixed for 3 to 5 years, then renegotiated Short-term loan (3to 5 years) but amortized over longer term, usually up to 30 years. Payments will change as interest rate changes.
  Short-term loan is automatically renewable; but if new interest rate is not acceptable, the borrower must either refinance or sell the property. The interest rate increases permitted each year and over the life of the loan may be limited.
Shared Appreciation Fixed Fixed Fixed
In return for lower interest rate the borrower agrees to share with the lender a percentage of any increase in the value of the home--at specified future dates or when it is sold, whichever occurs first. This plan may appeal to a first-time homebuyeras a way to make the purchase affordable. But remember, increase in value must be shared with the lender,; sharing a decrease in value may or may not be part of the agreement.
Wraparound (WRAP) Fixed Fixed Fixed
  The lender combines an existing mortgage on the property (bearing a lower rate) with a new mortgage for the balance needed (at a higher rate) to provide a lower overall cost to the borrower. This is possible only if the existing mortgage is assumable by the buyer. (All FHA and VA mortgages are assumable.)
Balloon Payment Fixed or adjustable Fixed. Traditionally 5 years but may be shorter or longer. Fixed, usually based on 20 to 30-year amortization, but at the end of term debt will not be fully paid. Borrower must pay off remaining "balloon" balance or refinance at prevailing rates.
  Because of short term and balloon payment, the down payment may be as little as 5 percent.
Reverse Annuity (RAM) May be adjustable May be fixed with refinancing option. Loan due when home is sold or upon death of borrower.
  This plan calls for periodic payments to homeowners based on a loan against their equity in a home. It is designed to appeal to older persons who may be having difficulty living on reduced incomes.
Shared Equity Varied Varied. Varied.
  Buyers co-purchase home with family member or investor, sharing down payment and leasing back portion of the property. A fair market rent is paid by the home buyer on the investor's part of the home. Tax benefits are created for co-buyer. Ultimate profits are shared when property is sold or buy-out may be arranged.
"Take Back" Usually fixed Usually short term. Usually a high down payment. May call for balloon payment at maturity.
  This is a loan by the seller of the property who agrees to take the mortgage in order to facilitate the sale.
Federal Housing Administration (FHA) insured Usually negotiated. Usually more favorable because of protection afforded lender. Points are negotiable but usually paid by seller. Fixed. Fixed or graduated, depending on FHA options.
  Available from lenders approved by FHA. Properties to be mortgaged must meet FHA requirements. Also "handyman's" specials may be mortgaged to include rehabilitation costs.
Veterans Administration (VA) guaranteed Interest set by VA. Veteran may not pay points. Fixed, usually 25-30 years. Fixed or graduated, depending on VA options.
  Terms are eased because of VA guarantee. No or low down payment. Veterens should check with VA for eligibility requirements and for other assistance related to housing.
Buy-Down Interest rate is reduced for a specific period or sometimes for the life of the loan. Fixed. Fixed for the term of the buy-down; usually increased thereafter.
  A seller or home builder pays an amount to a lender "up front" who then gives buyers a below market interest rate for the period covered by the buy-down. Through this arrangement the interest rate may increase after the buy-down period ends.
Assumable Varied. Varied. Varied.
  An assumable mortgage is an already existing mortgage (usually at a lower interest rate) that is taken on by the buyer. Usually the lender will have to approve the buyer. Most VA and FHA mortgages are assumable.
Special Mortgage Plans There are special government programs designed to assist home buyers available in many areas; occasionally a city or state will sell tax exempt bonds to raise funds for lower interest rate mortgages to qualified persons. In addition, HUD (U.S. Department Housing and Development) can provide information on various financial assistance programs of the Federal government. The local HUD or VA office number can be found in your local telephone directory.

 

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