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Corporate
Address:
226 Mohawk Drive
New Castle, PA 16105
800.525.7391
440.255.1199
Lic. #NMLS 244961
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Mortgage Types
(As you read
this, keep in mind that the mortgage industry is changing every day and many
mortgage companies are expanding their financing options. Therefore, understand
that these are general guidelines and feel free to ask your mortgage
broker/lender if any new guidelines apply.)
Mortgage
Programs
Conventional Mortgage Program
(also known as Conforming)
A conventional
mortgage is a loan that is long term (typically 30 or 15 years) and meets the
guidelines as put forth by FNMA (Federal National Mortgage Association) and
FHLMC (Federal Home Loan Mortgage Corp.). These guidelines include satisfactory
types of borrowers, kinds of property, and loans amounts up to $417,000. Mortgage Insurance (MI) is required on a
conventional loan if the loan-to-value is more than 80%. For example, if a
borrower purchases a home for $200,000 and applies for a loan of $180,000 (90%
loan-to-value), he or she will be required to pay mortgage insurance to obtain
the loan. Mortgage insurance is typically paid on a monthly basis. A
conventional mortgage is generally non-assumable and does not have a
pre-payment penalty.
Fixed Rate Conventional Mortgage. The most common type of
Conventional Mortgage is a fixed rate mortgage. Two distinct characteristics of
a fixed rate loan are an interest rate that doesn't change and a loan amount
that is repaid in equal monthly payments. The most common term lengths for
fixed rate mortgages are 30 years and 15 years. A 15 year term usually has a
lower interest rate than a 30 year term mortgage. As a fixed rate mortgage is
repaid, more interest than principal is paid in the early years of the loan.
However, the longer the borrower keeps and repays the mortgage, the larger the
percentage of principal is paid with each monthly payment. A lender/broker can
supply an amortization schedule to demonstrate this.
Adjustable Rate
Conventional Mortgage. Another type of Conventional Mortgage is an
adjustable rate mortgage (ARM). The main difference between an ARM and a fixed
rate is that an ARM has an interest rate and monthly payment that is subject to
change. This type of mortgage is less common than a fixed rate mortgage because
many borrowers do not want to worry about their mortgage rate changing during
the term of their loan. An ARM does have beneficial qualities that appeal to
borrowers in certain situations. An ARM is a mortgage with an interest rate
that is subject to change periodically, based on an index that is determined at
the time of obtaining the mortgage. The interest rate may go up or down, and
the monthly payments of the mortgage will adjust accordingly. As mentioned
before, there are advantages to an ARM. Usually, the beginning interest rate of
an ARM is lower than a fixed rate mortgage. This can be great for someone that
is going to live in his or her home for a short amount of time (usually less
than 5 years). And with a lower interest rate, the loan's payments are also
smaller. With a smaller monthly payment, a borrower can sometimes qualify for a
larger loan amount (this will depend on the lender). Some adjustable rate
mortgages can be assumable. Finally, if interest rates remain steady or
actually decrease an ARM can be less expensive than a fixed rate mortgage over
the long term. The main disadvantage of an ARM is the possibility of a higher
monthly payment. To many people, this is a high enough risk to outweigh any
advantages and thus avoid acquiring this type of loan. ARM products usually
have a beginning interest rate that is fixed for a predetermined amount of
time. Most lenders/brokers offer ARM mortgages that are fixed for 1, 3, 5, 7,
or even 10 years. The shorter the fixed time period, the lower the start rate.
These mortgages typically convert to a 1 year ARM after the first time period
has passed. At that point, the interest rate would be subject to change once a
year thereafter. The details of an ARM can be complex; borrowers should consult
their loan officer with any specific questions.
Balloon Conventional
Mortgages. One last type of Conventional Mortgage is a balloon mortgage.
This type of mortgage has a fixed interest rate, but at some point requires the
borrower(s) to make a final lump sum payment. Usually, a balloon mortgage has a
fixed interest rate and monthly payments are based on a 30 year fixed payment
schedule. However, the actual term of the loan is shorter than the 30 year
payment schedule. Most balloons have a 5 year term or a 7 year term. At the end
of the 5 or 7 years, the loan is due and payable in a lump sum. However, most
balloon mortgages include an option to refinance the loan at the end of the 5
or 7 years. A borrower might choose this type of mortgage if he or she plans on
living in the home a short amount of time and does not plan on needing a
mortgage for 30 or 15 years. Therefore, he or she would want to take advantage
of the lower interest rates offered with a balloon mortgage. Balloon and
adjustable rate mortgages offer lower introductory rates and greater
flexibility than fixed mortgages. Depending on each borrower's situation,
either of these products might provide a right combination of factors. All
borrowers should feel comfortable discussing different mortgage options with
their loan officer.
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Jumbo
Mortgage Program (also known as Non-Conforming)
A jumbo
mortgage consists of the same features as a conventional mortgage (see
definition above), however the loan amount exceeds the loan limit set by FNMA
and FHLMC.
Fixed Rate Jumbo Mortgages. One type of jumbo mortgage
is a fixed rate mortgage. The characteristics of a jumbo fixed rate mortgage
are the same as a conventional mortgage. Depending on the loan amount however,
certain loan-to-value restrictions may apply. Consult a qualified loan officer
for details.
Adjustable Rate Jumbo Mortgages. Jumbo mortgages can
have adjustable rates also. The features of a jumbo adjustable rate mortgage
(ARM) are similar to those of a conventional mortgage. Depending on the loan
amount however, certain loan-to-value restrictions may apply. Consult a
qualified loan officer for details.
Balloon Jumbo Mortgages.
Balloon jumbo mortgages are another option for a borrower. The guidelines for
this type of jumbo mortgage vary depending on lender/broker. Consult a
qualified loan officer for details regarding this type of loan.
Government Loans
(description to come)
Which type of mortgage is right
for you? We'll explain the differences and help you decide.
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