Mortgage Programs.

Types of Mortgages

Mortgages can be categorized into two different areas: conventional loans and government loans. Various Mortgage programs can further be categorized as fixed-rate loans or variable-rate loans or a combination of fixed and variable rate.

Conventional Loans

Conforming Loans

Guidelines associated with conforming loans have terms and conditions set by Freddie Mack and Fannie Mae. These are two stock owned mortgage corporations purchase mortgage loans complying with the mortgage lending institute guidelines from mortgage lending institutions that package the mortgages into securities and sell the packages to investors. These provide continuous flow of affordable funds for home financing that results in the available mortgage credit to americans. Guidelines are further established for the maximum loan amount, income requirements, borrow credit, required down payment and suitable properties as set by Freddie Mack and Fannie Mai. There are changes to the loan limits every year. Examine the loan limits for 2007:

Second Mortgage Limits: $208,500
In Hawaii, Alaska, Guam and the U.S. Virgin Islands: $312, 750

Properties with Five or more are considered commercial properties and are handled under different rules. It is important to note, that the maximum loan limits in Alaska, Hawaii, Guam, and the Virgin Islands are 50% Greater than the rest of the country.

Adjustable Rate Mortgages (ARMs)

These are Loans that have an variable interest rate or adjustable rate over the term of the loan and also vary in monthly mortgage payments. This type of loan has an index, which is established at the time of the application, sets the interest rate throughout the term. Periodic changes to the interest rate is determined by the adjustments to the index.

Balloon Mortgages

Balloon loans are short-term fixed rate loans and is based on a 30- year fully amortized schedule and have a fixed mortgage payment with a lump sum payout at the end of the term. The terms are usually 3- year, 5- year or 7-year. This type of loan has the advantage of lower monthly payments over 15- year and 30-year mortgages however, at the end of the term, the borrower will have to come up with a lump sum to pay off the lender, either through refinancing or from the borrower's own savings. Some balloon loans offer a refinancing option at the end of the term to a fixed rate loan based on the outstanding principle if the terms of the loan are met. If you exercise your option to refinance at the end of term, you may not have to be re qualified or the property may not have to be re approved. The interest rate on the new loan is usually the current rate at the time of refinance however, there may be a processing fees in order to obtain the new loan.

B/C/D Loans

'B', 'C' or 'D' Type paper Loans are ones that do not meet the credit requirements of Freddie Mack and Fannie Mae compared 'A' conforming loans as described above. These loans are offered to borrowers that may have had late payments on their credit report, foreclosure or filed for bankruptcy. Essentially, they are temporary loans until they can qualify for the conforming type 'A' loan. The interest rates and programs may vary based upon the borrower's credit history and financial situation.

Buy down Mortgages

This is a type of loan that has an initially discounted interest rate and gradually increase to an agreed fixed rate within one to three years. The advantage with the discounted rate is that it allows the borrower to qualify for more house or property with the same income and gives a lower monthly payment for the first years of the loan for extra money that is needed for home improvements. In order to reduce the monthly payments, the borrower may pay an initial lump sum or if cash is not available for the buy down, the lender may pay this fee, if there is an agreement for a little high interest rate.

Convertible Adjustable Rate Mortgages

In the event of changing interest rates (if they increase), some ARMs have an option to convert to a fixed rate mortgage. The new rate is the current market value for fixed rate mortgages. The disadvantage is that convertible ARMs is that the conversion rate is typically higher than the current market value rate at the time. Other convertible ARMs are fixed rate mortgages with rate reduction. If, for example, the rates had dropped since the time of closing, under some prescribed conditions, the mortgage rate can be adjusted to the current market value.

Fixed Period Adjustable Rate Mortgages (ARMs)

Borrowers can enjoy three to ten years of fixed payments before an initial interest rate change on this mortgage. At the end of the set period, the interest rate will then change and will adjust annually. The advantage of these type of loans is that the interest rate is usually lower than for a 30- year fixed mortgage.

Fixed Rate Mortgages (FRMs)

These type of loans have a fixed interest rate with the monthly payments remaining fixed through the term of the loan. Fixed Rate Mortgages are usually available for 30- years, 25- years, 20- years and 10-years. Often the shorter the loan, the lower the interest rate available. The most common FRM is a 30- year and 15- year term. The interest rate is often lower with the traditional 30- year loan than shorter term loans. If a borrower can afford the higher mortgage payments for a 15- year compared to a 30- year loan, this would allow the borrower to repay twice as fast and also saving on the total interest rate costs.

15- Year Fixed:
$110,000 Loan @ 5.0% = Monthly Payment $869.87 Total Interest Paid: $46, 577.16
30- Year Fixed:
$110,000 Loan @ 5.75% = Monthly Payment $641.93 Total Interest Paid: $121,094.85
As seen from this example, the amount of interest paid for a 30- year is $74,517.59 more than the 15-year loan or about 1.6x more to pay. The payments were calculated so that the mortgages were completely paid in full.

Graduated Payment Mortgages (GPMs)

These type of mortgages have a payment that start low and gradually increase at determined times. The advantage is that it allows the borrower to qualify for a larger loan amount and the monthly payments will be higher to catch up to the lower payments. In the early years of the loan, the mortgage will be negatively amortized during the beginning years of the loan and payoff the principal at a quicker rate during the later years.

Jumbo Loans

These types of loans have a larger maximum amount than established by Freddie Mack and Fannie Mai. These are considered non-conforming loans and often have higher interest rates than conforming loans because they are bought and sold more infrequently than conforming loans. The spread can vary between the two depending on the economy.

Negatively Amortized Loans

These type of loans (ARMs) limit the amount that can increase in monthly payment instead of a cap to the interest rate. If the interest rate rises to the point that the monthly payment can not cover the unpaid interest, it will get added to the loan balance. If there is no periodic interest rate cap, then the loan is negatively amortized. There usually is an option to pay the minimum amount due in monthly payment or the full amortized amount. The advantage to negatively amortized loans is that you can stabilize the payment, take advantage of the low interest rates relative to the market at any given time, and pay back the money at a depreciated value years later because of inflation.

Option Adjustable Rate Mortgages (ARMs)

The most creative Mortgage available in that it does require a set payment each month. After the first payment, the borrower gets four options. The lender sends you a statement each month offering the borrower to pay the minimum payment, interest-only payment, 30- year amortized payment or a 15- year amortized payment.

Two - Step Mortgage

These type of mortgages usually have a fixed interest rate, most often, for five to seven years and then the interest rate changes to the current market value. After the interest rate adjustment, it stays fixed for 23 or 25 years.

Government Loans

Federal Housing Administration Loans (FHA)

FHA Loans are government backed loans, easier to qualify that conventional loans and have lower down payment requirements. FHA insured loans are available for single family homes, two unit, three unit, four unit properties and condominiums. Down payments which are lower than conventional loans, can be as low as 3 % and the closing costs can be included in the mortgage. FHA Loans can not exceed set statutory limits.

Rural Housing Service Loans (RHS)

RHS Loans are guaranteed loans by the US Department of Agriculture available for rural residents with no down payment and no closing costs.

Veteran Affairs Loans (VA)

VA Loans are guaranteed by the US Department of Veterans Affairs. This type of loan allows service people and veterans to obtain home loans under favorable terms and often with no down payment. It is easier to qualify for this type of loan than a conventional loan up to a current maximum of $203,000. The VA determines eligibility for borrowers who qualify and they guarantee the loan made by lenders. The VA will issue a certificate of eligibility to the borrow, whom then uses it to qualify for the VA Loan.