Types of Mortgages
Fixed-rate mortgages are traditionally the most popular type of mortgage
in America . They are typically taken out over a 30-year period, but
lengths of 15 to 25 years are also available. The interest rate and
monthly mortgage payment on a fixed-rate mortgage remain the same throughout
the entire life of the loan. The main advantage of a fixed-rate mortgage
is that the borrower knows exactly what their monthly costs will be
until the entire mortgage has been completely paid out. The main disadvantage
is that the borrower pays a premium for this guarantee in the form of
slightly higher interest rates.
With adjustable-rate mortgages the interest rate is linked to current
market rates and fluctuates with economic changes. When interest rates
go down, so do your mortgage payments. When rates go up, your mortgage
payments increase accordingly. ARM interest rates are usually set lower
than those found in fixed-rate mortgage, at least at the beginning of
the term. This means that a homebuyer opting for an ARM will be able
to qualify for a larger loan since they are paying less interest. However,
because ARM interest rates fluctuate there is a level of uncertainty
and risk involved if economic conditions create long-term interest rate
increases. ARM interest rates are normally fixed for the first six months
to a year, after which they are pegged to some major economic index
such as the T-bill rate.
A 2-step mortgage is a combination of both fixed-rate mortgages and
adjustable-rate mortgages. Generally speaking, the first 5-7 years of
the mortgage are treated like a fixed-rate mortgage. During the remainder
of the term, known as the second step, the interest rate is allowed
to fluctuate like an adjustable-rate mortgage.
A conforming mortgage refers to a mortgage that is drawn up within
the guidelines specified by the lending institutions referred to as
Mac. The most common reason for a mortgage to be referred
to as non-conforming is because the total amount of the mortgage exceeds
the lending limits or total loan amount allowed. This type of non-conforming
loan is often referred to as a Jumbo mortgage.
This type of mortgage is usually amortized over the traditional 30-year
period, but the actual length of the loan, or the term, is much shorter.
At the end of the term, the homeowner must renegotiate a new mortgage
at the new current interest rates. The amount still owning at the end
of a balloon mortgage term (that is the original loan amount less the
payments made against the principle during the term) is then due in
full. The homeowner will then have to obtain a new mortgage (either
another balloon mortgage, or switch to a fixed-rate or adjustable-rate
mortgage) to replace the expired one. The benefit of a balloon mortgage
is that the interest rate is noticeably lower than that for traditional
30-year fixed-rate mortgages.
These are mortgages that are guaranteed against default by the Federal
government. Lenders are willing to give mortgages to homebuyers with
smaller down payments than under conventional financing because the
Federal government guarantees the loan against default. The homebuyer
must pay an insurance premium for this privilege and this cost is usually
added to the mortgage. In order to qualify for an FHAM the property
in question must meet certain requirements. The maximum amount of loan
allowed under this system varies from region to region and is based
on the average price of housing in each area. You should contact your
REALTOR® or mortgage specialist for further information.
Both Fannie Mae and Freddie Mac are independent, privately run companies
that operate under special congressional charters. Their mandate is
to ensure that mortgage funds are made available to a broad spectrum
of the American public. They do this by buying mortgages from approved
lenders and then packaging those monies into securities backed by Fannie
Mae/Freddie Mac. Those securities are then sold to investors in the
secondary mortgage market. Fannie Mae and Freddie Mac are independently
owned companies that compete with each other for mortgage business.
This competition ensures that there is an ample supply of low cost mortgage
money available to the American homebuyer.