Wednesday, June 17, 2009

Deciphering Mortgage Types

Deciphering Mortgage Loan Types

Home loans got your head spinning? You're not alone. We all need a clear explanation of mortgage types before we take the plunge into the home buying market. Get help understanding types of mortgages here before you go shopping for your own home loan. We've compiled a solid list of resources to consider when understanding mortgage types.

There are four basic types of mortgage loans: fixed rate loans, adjustable rate loans, convertible mortgage loans and balloon mortgage loans. Learn more here. Walletpop: Types of Mortgage Loans

You may have heard of FHA or VA Loans. The Federal Housing Administration (FHA) is part of the U.S. Dept. of Housing and Urban Development (HUD). An FHA loan usually requires a lower down payment and must not exceed the statutory limit. Similarly, VA loans, backed by the Department of Veteran Affairs can offer lower down payments and terms if you qualify for one.

Conventional loans may fall under the category of conforming or non-conforming. Conforming loans are backed by Fannie Mae and Freddie Mac, who set terms as to how much the loan may be for, what kind of credit requirements are involved and amount of down payment. Jumbo loans, above the maximum amount established by Fannie and Freddie can have higher interest rates.

Need more help with explanation of mortgage types? We have a simple explanation and list of some of the more popular loans. See which loan is right for you.

What is Negative Amortization?

Negative amortization happens when a loan payment schedule has increasing amounts each year because the scheduled monthly payments do not fully cover the amount of interest due. The unpaid interest builds up and is then added to the principal of the loan, resulting in you owing more on the loan balance each year instead of chipping away at the principal balance.

Graduated payment loans allow you to buy a home with a larger loan and a smaller payment up front. However, the payments go up at pre-determined times throughout the loan, and keep accelerating into larger payments toward the end of the loan life to catch up for the earlier lower payments. During this time, especially the early years, they are building up negative amortization, thus you are owing more each year on your loan balance than you started with.

Option ARM loans have become popular during the boom, as they allow you to buy a home with a large loan, yet pick which payment you want to send in monthly. In good times, you may choose the lowest payment, which would accrue negative amortization. In good times, you may want to bump it up to an interest only or even a fully amortized payment. These loans may be beneficial to someone starting out in a career that needs a lower loan payment option, but as you progress in life you can pay the higher amount, thus combating or making up for the early negative amortization.

Fixed Rate or Adjustable?

With a fixed rate loan your payment generally stays the same through the life of the loan. You can get a lower interest rate for shorter term loans, for example if you chose a 15 yr. vs. a 30 yr. You'll get a lower payment with a longer term however you'll pay a lot more interest, and therefore more on the total loan throughout the loan life.

Payments on adjustable rate mortgages (ARMs) change through the life of the loan. Adjustments are made to the interest rate of the loan based upon the defined index the loan uses, such as a Treasury Bill (T-Bill) or Cost of Savings Index (COSI) or many more. Arm Indexes Explained

If you really want some heavy reading on ARM loans, check out the Federal Reserve Board's Consumer Handbook on Adjustable Rate Loans.

Fixed or Adjustable? See which loan is right for you from Bankrate.

Glossary of adjustable rate mortgage terms:
Federal Reserve ARM Glossary

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