Mortgage Types

Traditional Mortgages

1. Fixed Rate Mortgages: This is a loan in which the entire term of the mortgage is fixed at one, unchanging rate. Payment, principal and interest remain the same for the entirety of the loan term. The fixed rate loan is considered the most, stable, consistent and safe loan to have. Fixed – rate loans are also known by the term Conventional Mortgage or FRM. The most common fixed rate terms are the 15yr and 30yr, but shorter and longer terms are available if needed.

2. FHA Loans: The acronym FHA stands for Federal Housing Administration. An FHA is a government insured loan that is fairly easy to qualify for and has low closing costs and down payment (3 percent down payment). FHA loans are also assumable, meaning the seller can transfer the loan to the new owner, which could help to alleviate fees on closing costs and other normal loan expenses. With the FHA loan 100 percent of the closing costs can be a gift from a relative, government or non-profit agency.

The current FHA programs are:

1. FHA 203: Fixed rate mortgage with a loan term of 15yr to 30yr.
2. FHA 251: Adjustable rate mortgage
3. FHA 2-1: Buy down loan

3. VA Loans: A loan specifically set up to help veterans and their families to obtain financing for a home. A VA loan property must be the borrower’s principal residence and will generally be homes found in rural areas of small cities. The U.S. Department of Veterans affair insures the VA loan should the borrower default on it.
In order to qualify for a VA loan, the prospective borrower must bring a certificate of eligibility into the lender to prove their years of military service. VA loans are 100 percent finance able, for the sale price or reasonable value of the home, whichever is less. VA loan borrowers are not required to pay Private mortgage insurance or PMI.

Interest Only Mortgages: An Interest- only mortgage is a loan where only the interest is paid each month, leaving the balance on the principal and interest untouched. During the interest only years of the mortgage the loan amount will not decrease and the borrowers will be not be able to establish any equity in the home. Interest only loans are considered to be a higher risk loan by mortgage lenders, so they will be subject to higher fees at closing. The interest only portion of the loan usually has a term of 1-5 years, at which time the remaining payments would be converted to principal and interest payments.

Hybrid Loans

1. Option ARM Mortgages: With an option arm mortgage the borrower picks their payment option month to month. The options the borrower is given to choose between are (Principal and Interest, Principal only or Interest only payments). The varying options can allow a borrow to keep their cash flow month to month at a comfortable level by allowing them in leaner months to make the lowest option payment. This is a loan that does have to be financially managed to insure the borrower doesn’t get hit with a huge balloon payment at the maturity of the loan.

2. Combo Piggyback Mortgage Loans: A combo piggyback is a type of loan where you have two loans being financed either through the same lender or one lender may be financing the primary mortgage, while a second lender is financing the second. A combo piggyback loan helps the borrower to avoid Private mortgage insurance or PMI. The combo piggyback can be either a First and Second mortgage or a First mortgage and a Second line of credit.

Types of combo loans available are (80 -10-10, 80-15-5 and 80-20). The first number represents the 80 percent of the homes purchased priced that is financed by the lender, the second number indicates the percentage amount of the loan secured by the second mortgage (this can be obtained with the same or a different lender), and the third number represents the percentage of the down payment.

With the 80-20 the borrower is not required to make a down payment. A combo piggyback loan allows a homebuyer to purchase with less down that a conventional or traditional home loan.

3. Adjustable Rate Mortgages: Known as an ARM the adjustable rate mortgage is identifiable by its changing interest rate. An Arm has 3 elements that affect its pricing structure (Starting rate, Prime or Treasury bill index and a Life cap). Typically adjustable rate mortgages have a lower starting rate to compensate for the possibility of the borrowers future rate increases, which will happen in most cases yearly, until they reach their maximum interest rate or life cap.

4. Mortgage Buy down: When you make upfront cash payment to reduce monthly payments on your mortgage loan it’s called a rate buy down. There are actually two types of Mortgage rate buy downs (Permanent and Temporary). The more common of mortgage buy downs is the temporary.

A temporary buy down is a mortgage in which the borrowers monthly payments consist only of principal and interest and during the early part of the loan a portion of mortgage payment is provided by a third party to reduce the borrowers monthly payments. In a temporary buy down situation the buyer’s payments are calculated at a lower interest rate than the actual loan rate, which makes the payments smaller.

Permanent buy downs are a less common type of rate reduction that would minimally lower the rate of the loan, but would do so for the life of the loan instead of a temporary time period. Principal buy – downs would be when a borrower makes a lump sum cash payment on their loan to try and increase the amount of equity they are accruing in their house.

Specialty Mortgages

1. Streamlined 203K Mortgage: A Streamlined 203K Mortgage is an FHA loan used for purchasing homes that are considered “fixer uppers”, so that buyers can afford to do much needed repairs. It is a rehab loan that eliminates the bulk of normal loan paperwork and makes it easier for a home buyer to get the funds needed to improve the property and increase its value. The Streamlined 203K would be figured into the original loan balance, resulting in just one loan. Choices are still available too as the Streamline 203K can be either an adjustable or a fixed rate loan.

There are however conditions that need to be met in order to qualify for this loan:

• Borrowers must occupy the property
• Property can’t be vacant for more than 30 days
• Work must be completed within 6 months
• Work must be professional (not necessarily done by a professional but must look as if it were)
• Work must be started within 30 days of closing
• Any and all permits require must be obtained.

2. Bridge Swing Loans: A Bridge/Swing loan is a temporary loan that bridges the gap between the sales price and the new mortgage when the buyer’s current home has not yet sold. Bridge / Swing loans are attached to the current home of the borrower and the funds are used for a down payment on the new home. In some cases a Bridge/Swing loan may not require the homeowner to make monthly payments in the first few months. Bridge / Swing loans can be more expensive than the alternative Home Equity loan, but in some cases they do contain more benefits.

3. Equity Mortgage Loans: Home Equity Mortgages are second to the primary loan and involve using the equity in your home to secure a loan by using your house as collateral. Borrowers can used the equity they receive from this type of mortgage however they choose and many will use it for things like home repairs, vacations, a child’s college fees or bank it in savings for the future. A home equity mortgage may be used in lieu of a Bridge/ Swing loan because of its lower rate and fees.

4. Reverse Mortgages: To qualify for a Reverse mortgage the borrower must be 62 years or older. It is a loan that has no income or credit score requirements and can be used to draw from the homeowner’s equity in which ever installment plans the homeowner chooses.

Installment Types:

1. Monthly installments, Line of credit
2. Almost all types of residential property are eligible for the Reverse Mortgage, but the borrower must meet certain qualifications to obtain one.
3. Must be the title holder of the property
4. Must be 62 years of age or older
5. Current mortgage needs to be fully paid off or have a low enough balance that it can be paid off with funds from the reverse mortgage at time of closing.
6. A reverse mortgage can become due if the borrower passes away, sells the home, fails to pay property taxes, fails to maintain the upkeep of the home, doesn’t keep the home insured, transfers title to another person or doesn’t live in the home for 12 consecutive months.