Types Of Mortgages
Conventional Mortgage. A mortgage that is not insured by a government agency. A ‘conforming” conventional mortgage is one that falls with the loan limits for a given year and conforms to the underwriting guidelines of Fannie Mae and Freddie Mac. A conventional mortgage may have a fixed or variable interest rate and payments throughout its life. Generally requires a down payment of 5% or more; private mortgage insurance is usually required if the down payment is less than 20%.
FHA mortgage. A mortgage for which the full amount of insured by the Federal Housing Administration. Its interest rate and payments may fixed or variable. The FHA offers government mortgage insurance to almost all qualified buyers. Because FHA does not require large down payments and allows buyers to finance part of the closing costs, FHA mortgages are attractive to buyers without sufficient cash for large down payments and closing costs, or for those who cannot qualify for conventional financing.
VA Mortgage. A VA loan is made by a lender and guaranteed up to a certain amount by the Department of Veterans Affairs, depending on the veteran’s entitlement. The VA guaranty is an incentive for lenders to offer loans with more favorable terms. It may have fixed or variable interest and payments. With a VA loan, no commission or brokerage feeon a mortgage can be charged to the veteran buyer and closing costs may not be included in the loan. No down payment is required.
Adjustable rate mortgage. (ARM). A mortgage that has a interest rate which is adjusted periodically, based on changing market rates. Usually has a lower initial interest rate and payment, with interest rate and payment gradually increasing over the life of the loan.
Graduated Payment Mortgage (GPM). A fixed rate loan amortized over a set period of time, usually 30 years. Payments start out smaller than a fixed rate mortgage and increase by a specified percentage each year during the payment period. The schedule of monthly payments is established in advance and are not affected by market conditions during the life of the loan.
Muslim financing. Muslim religious beliefs forbid paying or receiving interest. In order to remove this barrier to homeownership some lenders have developed a lease-purchase option for Muslim homebuyers who find conventional mortgages unacceptable. The agreements call for the buyer and the finance company to pool their money to buy a house. The buyer then makes monthly payments consisting of a fair-market rent payment and repayment of a portion of the lender’s capital. The rent is divided between the buyer and the lender based on how much each invested in the property. With each payment, the capital owed the lender and the lender’s ownership interest in the house is reduced. Gradually the lender receives smaller and smaller portions of the rent payment until all capital is repaid and rent payments are no longer required.
Growing Equity Mortgage. (GEM). A mortgage with a fixed rate with non-fixed payments. The loan is usually amortized over 30 years with the size of the monthly payments increased yearly by a predetermined amount. Additional payment amounts are applied directly to the principal so the balance is paid off sooner that with a fixed rate mortgage.
Balloon mortgage. A loan usually amortized over 30 years, but the remaining balance is actually due in full after a much shorter term, resulting in a large (balloon) payment at the end of that term. Most balloon mortgages have a term of five to seven years, but can be as long as fifteen years.
Interest only mortgage. The borrower pays only the interest on the mortgage in monthly payments for a fixed term. After the end of that term, usually five to seven years, the borrower either refinances, pays the balance in a lump sum, or starts paying off the principal, The interest only mortgage is most suitable for borrowers who expect to either sell their homes or refinance before the interest-only period ends.
Chattel loan. A loan on property, other than real estate. Often used to finance purchases of manufactured housing and mobile homes.