The Ashburn Group - Types of Mortgages

Types of Mortgages

Fixed-Rate Mortgages
Fixed-rate mortgages, the most popular type of mortgage, offer the peace of mind that your interest rate will remain the same for as long as you have your loan. If you expect to live in your home for many years, having the same interest rate may be your key concern. If you decide that you like the stable, predictable payments of a fixed-rate loan, you have the option of choosing from a variety of repayment terms: 15, 20, and 30 years are the most common. Typically, the longer the term of the mortgage, the more interest you pay over the life of your loan. However, stretching out your repayment term means your monthly mortgage payments will be less than they would be with a comparable shorter-term mortgage.

30-Year Fixed-Rate Mortgage
The most popular type of mortgage, the 30-year fixed-rate loan, is most appealing to borrowers who want to stay in their homes for a long period of time and who want to enjoy consistent payments during this period. Other benefits include keeping housing expenses to a minimum while maximizing mortgage interest deductions for income tax purposes.

Advantages:

Can require a low down payment, sometimes only 3 or 5 percent.
Consistent monthly payments.
Stable payments, monthly payment will not increase.
Provides maximum interest deduction for tax savings.

Details:
Eligible properties include one- to four-family, owner-occupied principal residences; second homes and investment properties; and condos, co-ops, and planned unit developments.

Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)

20-Year Fixed-Rate Mortgage
With a 20-year fixed-rate mortgage, you build up equity in your home more quickly and save quite a bit of interest over the life of your loan. As with all fixed-rate mortgages, the interest on your loan never changes, bringing you peace of mind that your principal and interest payments will remain level over time. However, higher monthly mortgage payments may make it more difficult to qualify for compared to the 30-year fixed-rate mortgage.

Advantages:

You pay less interest over the life of your loan, compared to a 30-year fixed rate mortgage. For example, on a $100,000 loan at 8.25 percent interest, the 20-year fixed rate mortgage can save you over $65,000 in interest payments when compared to a 30-year mortgage.
Interest rate payments in the early years of the mortgage are comparable to a 30-year mortgage, allowing for a sizable mortgage interest tax deduction.
Your monthly payments are significantly less than for a 15-year mortgage, allowing you a greater chance to qualify for this type of mortgage.

Details:
Eligible properties include one- to four-family, owner-occupied principal residences; second homes and investment properties; and condos, co-ops, and planned unit developments.

Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)

15-Year Fixed-Rate Mortgage
You pay off a 15-year fixed-rate mortgage in half the time you pay off the traditional 30-year fixed-rate mortgage. This shorter term makes it possible for you to build up equity in your home faster, which can let you move up more quickly to a more expensive home or save more in preparation for retirement or a child's education. This loan is particularly attractive if you're refinancing your mortgage because you shorten your loan term plus enjoy a lower interest rate - 15-year mortgages are usually offered at interest rates lower than those available with 30-year mortgages. However, higher monthly payments may make it more difficult to qualify for compared to the 30-year fixed-rate mortgage.

Advantages:

Offers a lower interest rate than a 30-year or 20-year mortgage.
Saves you a significant amount of interest over the life of the loan. For example, with a $100,000 loan at 8.25 percent interest, the 15-year mortgage will save you $95,000 in interest payments over the life of your loan, compared to the same mortgage amount for a 30-year term. However, your monthly mortgage payments will be higher.
This shorter-term mortgage allows you to own your home outright sooner.

Advantages:

For the first 15 years, monthly payments are lower than a comparable 30-year fixed-rate loan.
Gain control of your cash flow.
Ideal if you plan to stay in your home no more than 15 years and want the lowest monthly payment for that period.
Flexible cash flow for college costs, home improvements, IRA contributions, consumer debt reduction, or optional principal payments.

Details:
For the first 15 years, you pay only the interest due every month.
Any prepayments will reduce your principal balance and reduce future monthly payments.
Prepayment of principal may be made without penalty.
Payment adjusts at the start of year 16 to cover all interest and principal due on the loan for the remaining 15 years.
Monthly payment is fixed during years 16 through 30.
Balloon Mortgages
The seven-year balloon mortgage is a type of fixed-rate mortgage with a term of seven years. The principal and interest you pay are amortized over a longer period (30 years) than the actual term of the mortgage. At the end of the balloon period, you may pay off the outstanding balance with a lump-sum payment or exercise the option to refinance for the remaining term. The option to refinance is conditional, meaning you have to meet certain conditions (such as a history of timely payments or no second liens on your property).

Advantages:
Ideal if you plan to sell or refinance your home within seven years and want a low monthly payment during that time. The interest rate you pay on a balloon mortgage is usually lower than a comparable 30-year fixed-rate mortgage.
With a refinance option at the end of seven years, you have a "safety net" in case a planned relocation doesn't take place or economic conditions prevent you from moving to a larger home. (You may want to understand all the conditions needed for a refinance before getting this loan.)
You need not re-qualify for this loan when refinancing at the end of seven years as long as the new interest rate is not more than 5 percent above the current interest rate.

Details:
The refinance condition is not automatic – you must exercise the option.
Refinancing conditions may include payment of closing costs and a lender fee, as well as no
30-day late payments in the previous 12 months and no other liens on your property.
You must occupy your property at the time of refinancing.
This mortgage can be used to buy one-family, principal residences, including condos and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
Construction-to-Permanent Mortgage
This mortgage gives you the financial power to build your own home – you can borrow money to build a home from the ground up or to finish building a home that's currently under construction. This loan provides financing from the construction through the purchase phases of your new home.

Advantages:
You enjoy peace of mind by locking in fixed interest rates on both the construction and permanent mortgage financing phases of your home purchase in one convenient loan.
You can borrow a minimum of 95 percent of the construction cost or the as-completed value of the property (which means your down payment can be as low as 5 percent).
You can use this mortgage to purchase land upon which you build your home.
You save money because there is one set of closing costs, compared to those associated with separate loans for construction and occupancy.
You pay interest only on the funds disbursed during construction.
This mortgage can be used for construction that's already under way.

Details:
A minimum down payment of 5 percent for a one-unit home and 10 percent for two-unit homes.
Construction phases of six, nine, or 12 months, with extensions available up to six months, are allowed.
This loan is available for one- and two-unit owner-occupied homes, one-unit second homes, and one-unit investor homes.
You can choose a 15- or 30-year fixed-rate mortgage. You can also include the construction phase in these terms, or not, depending on your preference. You can also finance with fixed-period ARMs.
Adjustable-Rate Mortgages (ARMs)
Fannie Mae began offering the adjustable-rate mortgage (ARM) in the early '80s, when long-term interest rates were high and people needed a new type of financing to buy homes. These products start out with a lower interest rate, then the interest rate adjusts periodically. If you're confident that your income will increase steadily over the years, or if you plan to move in a few years and aren't concerned about potential rate increases, you may want to consider a Fannie Mae adjustable-rate mortgage. With an ARM, your interest rate may move up or down as market conditions change. Interest rate changes typically are subject to two caps, one for each adjustment period and one for the life of your loan. When discussing ARMs with your Fannie Mae-approved lender, be sure to ask what the maximum interest rate adjustments can be for any ARM product you consider.
Fixed-Period Adjustable-Rate Mortgages
This type of adjustable-rate mortgage (ARM) maintains the same initial interest rate for the first three, five, seven, or 10 years of your loan, depending on the term you choose. Your interest rate then adjusts annually, and can move up or down as market conditions change. Be sure to ask your lender about the interest rate caps for both the annual adjustments and for the life of the loan.

Advantages:
Your initial interest rate will be lower than a fixed-rate mortgage, so you may be able to afford more home.
You are protected against interest rate increases for the first three, five, seven, or 10 years of the loan, depending on which type of fixed-period ARM you choose.
You may have the option to convert your ARM to a fixed-rate mortgage at the first, second, or third interest rate adjustment dates.
You have time to improve your financial position (i.e., salary increases) or accumulate additional assets before the interest rate adjusts at the end of the fixed period.

Details:
The lifetime interest rate cap for fixed-period ARMs is typically 5 to 6 percentage points above your initial rate. Your annual cap during the adjustable period is typically 1 to 2 percentage points above or below over the current rate.
Can be used to buy one- to four-family residences including second homes and condos, co-ops and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
One-Year Adjustable-Rate Mortgage
This adjustable-rate mortgage (ARM) offers a low initial interest rate with an interest rate that adjusts annually after the first year. The rate cap per annual adjustment is usually 2 percent; the lifetime adjustment caps can be 5 percent or 6 percent. This type of mortgage may be right for you if you anticipate a rapid increase in income over the first few years of your mortgage. That's because it lets you maximize your purchasing power immediately. It may also be the right mortgage for you if you plan to live in your home for only a few years.

Advantages:
Maximizes your buying power immediately, especially if you expect your income to rise quickly in the next few years.
A low first-year interest rate and a 2 percent annual rate cap.
Some one-year ARMs let you convert to a fixed-rate loan at certain adjustment intervals - ask your lender which of their one-year ARMs include this option.
Generally, conversions to fixed-rate mortgages are allowed at the third, fourth, or fifth interest rate adjustment dates.

Details:
You can get a one-year ARM with a term from 10 to 30 years. The most typical ones are 10, 15, or 30 years.
The one-year ARM is most often indexed to the weekly average yield of U.S. Treasury securities adjusted to a constant maturity of one year.
Can be used to buy one-family, principal residences, including condos, and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
Six-Month Adjustable-Rate Mortgage
This adjustable-rate mortgage (ARM) offers a low initial interest rate for the first six months with an interest rate that adjusts every six months thereafter. The rate caps per adjustment can be 1 percent or 2 percent; the lifetime adjustment caps can be 4 percent, 5 percent, or 6 percent. This type of mortgage may be right for you if you anticipate a rapid increase in income over the first few years of your mortgage. That's because it lets you maximize your purchasing power immediately. It may also be the right mortgage for you if you plan to live in your home for only a few years.

The interest rate is tied to a published financial index. When comparing ARMs that have different indexes, look at how the index has performed recently. Your lender can provide information on how to track a specific index and how to review a 15-year history of the index.

Advantages:
Maximizes your buying power immediately, especially if you expect your income to rise quickly in the next few years.
Lets you select an index that meets your financial needs.
Easier to qualify for due to a low interest rate and a 1 or 2 percent annual rate cap.
Some six-month ARMs let you convert to a fixed-rate loan at certain adjustment intervals - ask your lender which of their six-month ARMs include this option.
Your lender can also provide further specifics about this mortgage option.

Details:
You can get a six-month ARM with a term of 10 to 30 years. Typically, they are 10, 15, or 30 years.
Can be used to buy one- to four-family, owner-occupied principal residences including second homes, investment properties, and condos, co-ops and planned unit developments.
Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
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