Various Kinds of Mortgage Loans
There are numerous mortgage loan programs, these
are the most common
There are mortgage loans designed to meet the
needs of just about anyone. A good mortgage
broker will help you to decide on a loan that
fits both your current financial situation and
your future plans.
A fixed-rate mortgage carries the same interest
rate for the life of the loan. Fixed-rate
mortgages are the most popular choice among
homeowners. This is because the fixed monthly
payment is easy to plan and budget for and can
help protect against inflation.
Fixed-rate mortgages are most common in 30-year
and 15-year terms.
Adjustable-rate mortgages (ARM)
Adjustable-rate mortgages differ from fixed-rate
mortgages in that the interest rate and monthly
payment can change over the life of the loan.
This is because the interest rate for an ARM is
tied to an index (such as Treasury Securities)
that will rise or fall over time. To protect
against dramatic increases in the rate, ARM
loans usually have caps that limit the rate from
rising above a certain amount between
adjustments, as well as a ceiling on how much
the rate can go up during the life of the loan.
Because of their low introductory rates, ARM
loans have become the most widely accepted
alternative to fixed-rate mortgages.
These are loans for people with special
circumstances which don't conform to the general
"borrower" profile. Special circumstances may
include borrowers who are self employed, have
variable incomes, beginning a new career, low
credit scores, recently bankrupt, or new to this
country. These loans often carry a higher
interest rate to adjust for the risk the lender
Hybrid loans combine features of both fixed-rate
and adjustable-rate mortgages. Typically, a
hybrid loan may start with a fixed-rate for a
certain length of time, and then later
convert to an adjustable-rate mortgage.
No doc or low-doc loan
No-documentation or low-documentation loans are
designed for the entrepreneur or self-employed,
recent immigrants with money in foreign
countries or for borrowers who cannot, or choose
not to, reveal information about their incomes.
These loans require no documents, such as tax
returns, W2 forms or paychecks, or bank
statements. Only assets required for the down
payment and closing costs are verified. These
loans have a higher interest rate than the
To qualify for this type of loan a borrower must
be self-employed for at least two years, have a
down payment of from 20 percent to 35 percent,
and an excellent credit history.
These are the loans for people with past or
current credit problems. The lenders are more
lenient about your credit history, but they also
charge higher rates and fees. Still, this is a
way for people with credit problems to get into
a house and, at the same time, boost
their credit standing.
This is considered a nonconforming loan, because
it exceeds the loan limit set by Fannie Mae and
Freddie Mac, the two publicly chartered
corporations that buy mortgage loans from
lenders. The 2001 single-family loan limit is
$275,000. If you need to borrow more than that,
you will need a jumbo mortgage, which generally
has a higher interest rate than "conforming"
A conventional loan is simply a loan offered by
a traditional private lender. They may be fixed
rate, adjustable, hybrid or other types. While
conventional loans may be harder to qualify
for than government-backed loans, they often
require less paperwork and typically do not have
a maximum allowable amount.
This type of
loan is used by homebuyers who have excellent
credit, wish to make no down payment and want to
save the cost of making PMI (private mortgage
The first mortgage is for 80% of the sales
price, and a second mortage is for the 20% down
payment. The second mortgage is at a higher
interest rate and will be paid off in a shorter
period of time.
FHA and VA loans
The Federal Housing Authority (FHA) and
Department of Veterans Affairs (VA) offer loans
designed to promote home ownership for people
who might not otherwise be able to qualify for a
conventional loan. Both FHA and VA loans have
lower qualifying ratios than conventional loans,
and often require smaller down payments.
The U.S. Government does not issue FHA and VA
loans. The loans are made by private lenders and
are insured by the U.S. government in case the
borrower defaults. Any U.S. citizen may apply
for an FHA loan. VA loans are only available to
veterans or their spouses and certain government