|
Conventional Loans
Any mortgage loan other than an FHA, VA or an RHS loan is considered a
conventional Mortgage.
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. Go to FHA Programs page to get more information.
If you are looking for an FHA home loan right now, please feel free to
request personalized rate quotes from HUD-approved mortgage lenders via our
website.
VA Loans
VA loans are guaranteed by U.S. Dept. of Veterans Affairs. The guaranty
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. Lenders generally limit the maximum
VA loan to $203,000. 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 making application to private lending
institutions. If you are interesting in obtaining a VA-guaranteed loan you
can try our VA loan request form.
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,
packages 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 results 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 announces new loan limits every year.
The 2007 conforming loan limits for first mortgages remain at the limits set
in 2006:
One-family:
$417,000
Two-family:
$533,850
Three-family:
$645,300
Four-family:
$801,950
The maximum loan amount is 50 percent higher in Alaska,
Guam, Hawaii, and the Virgin Islands. Properties with five or more units are
considered commercial properties and are handled under different rules.
The 2007 loan limit for second mortgages is $208,500 (in Alaska, Guam,
Hawaii, and the Virgin Islands, the maximum second loan amount is $312,750).
The sum of the original loan amounts of the first and second mortgages
cannot exceed $417,000 (or $625,500 in Alaska, Guam, Hawaii, and the Virgin
Islands).
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 little 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 take advantage of our database of the most competitive lenders
available. Just complete a short loan request form and the best lenders in
your local area will contact you with their rates and fees.
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. Examples: 3/27 ARM Loan, 2/28 ARM Loan.
Fixed Rate Mortgages
With fixed rate mortgage (FRM) loan 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 years 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 faster
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, as illustrated on our graph:
With 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. Usually they 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 resulting in lower
monthly payments. The disadvantage is that at the end of the term 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 option 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 need not be re-qualified, nor the
property re-approved. The interest rate on the new loan is a 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 loan whose interest rate, and accordingly
monthly payments, fluctuate 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. New interest rate = index + margin. The margin is
fixed percentage points added to the index to compute the interest rate. The
result will then be rounded to the nearest one-eighth of a percent.
Example:
The index is 5.3% and the margin is 2.5%,
then the new interest rate = 5.3% + 2.5% = 7.8%.
The nearest to 0.8% is 0.75% = 6/8%.
The result will be 7.75%.
The margins remain fixed for the term of the loan and are not impacted by
the financial markets and movement of interest rates. Lenders use a variety
of margins depending upon the loan program and adjustment periods.
Most ARMs have an interest rate caps 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.
Examples:
The initial interest rate is 4.5%, the index is 7%, and the margin is 3%,
then the new interest rate = 7% + 3% = 10%.
If the lifetime cap is 5% then the actual new interest rate will be 4.5% +
5% = 9.5%.
The initial interest rate is 6%, the index is 5%, and the margin is 3%, then
the new interest rate = 5% + 3% = 8%.
If the periodic cap is 1% then the actual new interest rate will be 6% + 1%
= 7%.
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.
Negatively Amortizing Loans
Some types of ARMs (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: if the interest rates rise to
the point that 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.
Examples:
Your loan has a payment cap of 7.5%. If your payment is $1,000 per month and
interest rates rise, your new payment would normally be $1,200/mo (for
example). But your capped payment is only $1,075. The other $125 get added
to your loan balance, to be paid off over time, unless of course you decide
to pay that additional amount now.
The advantage of negatively 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 what's going on.
With most ARMs, 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 negatively 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 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 minimum payment (1), interest-only payment (2), 30-year amortized
payment (3) or 15-year amortized payment (4).
Hybrid Loans
Hybrid loans, a combination of fixed and ARM loans, come in different
varieties:
Fixed-Period ARMs
With fixed-period ARMs homeowners can enjoy from three to ten years of fixed
payments before the initial interest rate change. 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. ARMs with an initial fixed period beside of lifetime and
adjustment caps usually have also first adjustment cap. It limits the
interest rate you will pay the first time your rate is adjusted. First
adjustment caps vary with type of loan program.
The advantage of these loans is that the interest rate is lower than for a
30-year fixed (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.
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.
Graduated Payment Mortgages
(GPMs)
Graduated payment mortgages have payments that start low and gradually
increase at predetermined times. A lower initial payments allow you to
qualify for a larger loan amount. The monthly payments will eventually be
higher in order to catch up from the lower payments. In fact, your loan will
be negatively amortizing during the early years of the loan, then pay off
the principal at an accelerated pace through the later years.
Lenders offer different GPM payment plans, which vary in the rate of payment
increases and the number of years over which the payments will increase. The
greater the rate of increase or the longer the period of increase, the lower
the mortgage payments in the early years.
Example
The following table compares the monthly payment schedule of a 30 year fixed
rate loan with the most frequently used GPM plan. In this plan payments
increase 7.5 percent each year for 5 years before leveling off.
The example uses a mortgage with a loan amount of $60,000 and an interest
rate of 10 percent.
Interest Only
Mortgages
An interest-only mortgage is one that gives you the option of paying just
the interest or the interest and as much principal as you want in any given
month during an initial period of time after your closing. For many, the
most appealing feature of an interest-only loan is that you control your
payment amount and your cash flow in any given month during the
interest-only period, and your monthly mortgage payment will be lower than
it would be with an interest plus principal payment. Your interest rate may
or may not be lower than a traditional mortgage, depending on your specific
situation, but you will have the option of flexible payments.
30-40-50 Year Mortgages
A 40 (or 50) year mortgage is a conventional
mortgage, but instead of repaying the principal over the standard 15, 20 or
30 years (the amortization period), you pay it off over 40 (or 50) years. In
many cases, the lender simply extends the life of its 30-year fixed-rate
mortgage to 40 years or more. Some lenders also offer a 40-year version of
their adjustable-rate mortgage (ARM). The biggest advantage of a 40-year
mortgage is that you get a lower payment. For example, the monthly payment
for a 30-year, $100,000 mortgage at 6 percent would be about $599. By
choosing a 40-year mortgage, you would get a slightly higher interest rate
-- say, 6.25 percent -- but your payment would fall to $568. Longer terms
may mean lower payments for you, but will also obviously mean a longer
repayment term for the life of your mortgage. |
 |
