Types Of Mortgages

Flexibility Is The Key Today

Depending upon where you live in the world, the variety of mortgages available to a person is almost limitless. Banks and loan companies have figured out that in order to service clients effectively, and not lose out in the end, there has to be a lot of flexibility. In today's housing market, with the economy variable on most days, stable on some, it is necessary to find the type of mortgage that is best suited to the individuals and the institutions.

At one time there were only two or three types of mortgages from which to choose. In the US, the home buyer could get a fixed-rate conventional mortgage, or an FHA or VHA loan to finance their home. That was in the "good old days." Today, the market is filled with a wide array of options to choose from, many of them very appealing for first-time buyers.

Fixed-Rate Mortgages

Starting from the oldest and working our way forward, we have the conventional fixed-rate mortgage. This type of mortgage has been the mainstay of the industry, offering a security that remains appealing to this day. A fixed-rate mortgage allows the debtor to repay the mortgage in regular equal monthly installments over a specified period of time. Today, the period is anywhere from 10 to 50 years. The payments are first applied to the interest and then to the principal of the loan. The windup is that interest payments actually can exceed the principal payments. However, the interest rate is fixed, so if the interest rates rise, there's no need for worry. There are payment options available that make paying off the mortgage easier and faster, as well.

FHA & VHA Loans

FHA loans are guaranteed by the government through mortgage insurance funded into the loan. This is a good choice for a first-time buyer because the down payment is low and FICO scores are not important. VHA loans are for veterans and, in some cases, spouses of deceased vets, of the US military. There are some criteria that determine the requirements for the loan, such as year of service and conditions of discharge. To help the veterans, no down payment is necessary and although the loan is held by a conventional carrier, it is guaranteed by the Department of Veteran Affairs.

Interest Free? 

Interest only mortgages may be a bit of a misnomer because this type of mortgage loan does not mean the borrower only pays the interest on the loan. What is does mean is that the borrower has an option to make an interest-only payment, and that option is only for a specified period of time.

Hybrid Loans

Now we move into what are termed "hybrid" mortgage loans. Option ARM loans are not easy to figure out. This type of mortgage is known as an adjustable-rate mortgage (ARM), which means that the interest rate fluctuates at times. There are a variety of payment options available to the borrower with this type of mortgage. However, if the minimum payment option is chosen, it could result in a negative amortization situation. The interest rates on an ARM may move up or down every month, semi-annually, every year, or it can remain fixed for a specific period of time before it is adjusted.

A combo/piggyback mortgage means that both a first and second mortgage are secured at the same time. The rates can be either adjustable or fixed, or a combination. Two loans are taken out in order to avoid paying private mortgage insurance when the down payment is less than 20 percent. Mortgage buy down mean that the borrower can benefit from a reduction in interest rates due to fees being paid in order to lower the rate. Sellers, buyers or lenders can buy down the interest rate for the borrower.

These Loans Are Special

The final category of mortgage loan types are considered specialties. The FHA has a program that allows the borrower to invest in fixing his home by rolling the amount of money borrowed into the mortgage loan. The amount of money available for such a loan is lower on this type, called a Streamlined-K loan (like the 203K loan program), but the person can access the funds quickly and there's a lot less paperwork involved.

Bridge or swing loans are used when a person puts their house on the market and it hasn't yet sold, but the seller wants to invest in another property. The existing home is used as collateral for a bridge loan. Equity loans are simply borrowing against the equity in the home. Cash is received by the borrower and the equity loan is more like a line of credit than a mortgage.

When a person has enough equity in their property, they may want to have a reverse mortgage, which means that the lender makes payments to the home owner for as long as the borrower lives in the house with adjustable or fixed interest rates.