Today’s lending institutions are getting more lenient, and many of them are offering more buyer-friendly schemes to their clients to encourage people to apply for mortgage. Here are the different types of mortgages that will best suit your home financing needs:
This type of mortgage involves a straight monthly payment schedule with a fixed interest rate throughout the duration of the loan. The borrower can choose how long the paying period will be, say 10 years or even as long as 25 years depending on the affordability of amortization based on declared income.
One advantage of this scheme is that the borrower will be paying the same monthly amortization until the account balance is settled. This contract is one of the most secure and stable in all mortgage options because the interest rate is not affected by the fluctuating rate of currency. Other types of mortgages allow financing companies to make rate adjustments. On the negative side, when borrowing rates in the market decline, you are stuck with paying the same higher interest rate established at the start of the loan period.
Adjustable-Rate Mortgages (ARMs)
Also known as “variable rate mortgage”, ARM is subject to possible rate changes due to movement of indices or benchmarks that affect the investments of financing companies. The interest rate for this type of mortgage usually starts at a fixed rate in the first two years but eventually changes when there is movement of the borrowing rate in credit market.
The advantage of this mortgage is the lower interest rate at the start of the loan period; however the interest rate will automatically change with factors affecting the financial world. Most borrowers take advantage of this particular loan when planning for a short term financing. However, you should take note of the downside: the floating characteristic of the interest rates will definitely affect your spending when the rates to up. This is especially difficult when you’re planning to apply for a long term contract.
One-Year Treasury ARM
The interest rate of this type of mortgage is unpredictable in the next year depending on the treasury index. This index will be used to calculate the new interest rate based on the percentage or margin that the financing companies believe is sufficient to recover their investment.
If the treasury index goes down, then this will bring down the interest rates for the succeeding years of the loan, which is clearly an advantage for the borrower.
Also known as “hybrid mortgage”, intermediate ARM is a combination of fixed rate mortgage and adjustable rate mortgage. The borrower will be dealing with two different schemes in one mortgage: A fixed interest rate is applied for a certain period (say 3, 5 or 10 years), and the succeeding year will be under an ARM arrangement.
Interest rates under hybrid mortgages are protected by a cap figure so that borrowers will not be affected by fluctuating market rates. This prevents the borrower from paying much more than they bargained for. Its disadvantage, however, lies in the fact that part of the loan period follows the ARM principle. When the fixed rate term is completed, there is a risk of paying higher interest rates when the ARM period comes.
Flexible Payment Option ARM
Borrowers are given four options to pay their accounts in this type of scheme: 15-year term, 30-year term, interest-only payment, or minimum monthly payment. All options refer to adjustable rate mortgage that can be updated every month without the protection of caps.
Most borrowers usually apply for this type of ARM because it initially offers low interest rate on the first month, although interest rate may shoot up in the succeeding months to reach the full indexed rate. There are also borrowers who opt for the minimum monthly payment scheme without fully understanding the risk of losing their property when the monthly amortization balloons. As a prospective borrower, you need to take great care in these things.
In this type of ARM, only the declared interest rate will be paid without touching the principal amount of loan. This is applicable during the interest-only period, and the amount of payment will substantially increase once the borrower starts to amortize the principal amount to pay off debts within the original term.
The low amortization will allow you to have extra cash each month. However, the biggest drawback is the possibility of dealing with payment shock risk. You may suffer not only the increase in the payment of amortization upon expiration of the interest-only period, but also the danger of paying high interest because of increasing full indexed rate.
Can you imagine paying both the principal and high interest rate at the same time? If not, do not be misled by this scheme unless you have enough resources to cover the risk of its fluctuating rate.
This type of mortgage gives the borrower an option to convert the previous adjustable rate mortgage to a fixed-rate mortgage. This is usually marketed to lure home buyers to rising interest rates, and it usually includes a number of conditions and a fee.
Switching from ARM to fixed-rate mortgage using this type of payment scheme takes your worry away from any rate adjustments. However, it usually has a higher interest rate than the standard fixed rates. You will also miss the opportunity to enjoy low interest rate once the market borrowing rate drops.
This is a type of mortgage scheme wherein you can borrow more than the loan limits as set by the Office of Federal Housing Enterprise Oversight (OFHEO). This loan is overpriced or over-appraised, therefore exposing the borrower to greater risk of paying high interest rates and making them prone to non-payment of loans.
With this loan type, you can acquire a luxury house through your good credit background even though you have low capital to purchase a high-priced property. It comes with a hefty price, though, with bigger down payments and higher interest rates.
Nevertheless, if you think that you have enough money to sustain the payments, then you may opt for this type of loan.
In this mortgage arrangement, the buyer assumes ownership of an existing mortgage of the seller (presumably the first buyer) upon the approval of the mortgage lender. This transaction is beneficial to the second buyer – which, hopefully, is you. In the event interest rates surge, the cost of borrowing also increases. Despite this, the second buyer who purchases the home through assumable mortgage is spared from paying the jacked-up rate.
Take note that the remaining cost of the home may not be covered by the assumable mortgage. As a result, you may need to shoulder the down payment and even secure additional financing.
This type of mortgage is a heavy burden on the seller or original buyer because the loan is still in his name. In case the second buyer defaults the loan after assumption takes place, the seller is held liable by the lender. It is vital that both parties – the seller and the new buyer – draw a written contract to protect both their interests.
Balloon Conforming Mortgage
Balloon conforming mortgage is a type of loan in which terms and conditions follow the recommendations introduced by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. In this case, the mortgage is equal to or less than the dollar value assigned by the conforming limit.
This mortgage allows the borrower to pay only the interest for a period of time – say five to ten years – at fixed interest rate and the principal amount will be paid in full upon the end of the term. This type of loan is favorable to borrowers who plan to invest on real property while taking advantage of the low payment method, and expect to dispose the property before the mortgage term ended.
However, there is great danger of losing your property once payment will default in one single payment due to balloon contract stipulation that allows lenders to reject application for refinancing of the account.
VA Home Loans
This loan is designed for U.S. military veterans to help them acquire a home of their own that is affordable and without down payment or equity required. This loan package is different from traditional mortgages as it offers no additional cost of insurance and in very affordable interest rates. You only need to qualify as eligible VA home applicant to enjoy this program.
Federal Housing Administration Loans (FHA)
This housing loan program is designed by the U.S. government to help citizens own a home. It offers low interest rates and provides cash subsidy to those who cannot afford the required down payment. However, if you have the patience to search, you can find more competitive and affordable interest rates in other traditional loans.
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