Types of Mortgages
Balloon
Conforming
Conventional
Jumbo
Negative Amortization
Non Conforming
Subprime
Fixed Rate
Mortgages (FRM's)
Adjustable
Rate Mortgages (ARM's)
Balloon Loan
Out of the many types of mortgages, balloon mortgages may
be the least used out of all of the different types of
mortgages. They are short term fixed rate loans which
give you a set monthly payment based on a 30 year fully
amortized schedule and a "balloon" payment at the end of its
term.
A balloon mortgage can be advantageous as the interest
rate charged is almost always lower than your standard 30
year fixed rate mortgage because terms are generally much
shorter at 3, 5, 7 and 10 years which leads to lower monthly
payments. The disadvantage is that at the end of the term
you will have to come up with a lump sum to pay off your
lender, either through a refinance or from your own savings.
Balloon mortgages with refinancing alternatives do let
borrowers convert their balloon mortgage at the end of the
3, 5, 7 or 10 year term period over to a new mortgage loan
product. These built in refinancing options are commonly
based upon the outstanding principal balance, but only if
particular considerations are met. The tremendous advantage
to having the built in refinance option is you will not need
to qualify for the new loan or have the property
reappraised. The interest rate on the new mortgage will
consist of the current rate at the time of
transition, but there should be only minimal fees charged in order to
obtain the new loan.
Conforming Loan
Conforming loans are considered the main stream mortgage out of all
types of mortgages on the market today. They consist of loans secured by Government Sponsored
Entities (GSE's), known as Freddie Mac (FRE)
and Fannie Mae (FNM).
These agencies having been chartered by Congress since 1970 to increase
the supply of funds to home buyers and multifamily investors, have the
ability to pool large amounts of mortgage loans for resale to investors
such as pension funds or insurance companies. By doing this they
lower their exposure to any one loan, which in turn allows your local
mortgage company to offer you a lower interest rate then would otherwise
be possible.
Freddie Mac and Fannie Mae are also responsible for establishing the
uniform underwriting guidelines for conforming mortgage loans.
These include suitable properties, credit, down payment and income.
The maximum conforming loan limits are set by the Office of Federal
Housing Enterprise Oversight (OFHEO), a government agency responsible
for regulating Freddie Mac and Fannie Mae.
The 2009 loan limits will not be raised, continuing to hold at 2008
levels.
|
Property Type |
2009
Maximum original loan amount
(except for AK, HI, GU & VI)
|
2009
Maximum original loan amount
for properties in AK, HI, GU &
VI |
| 1 - unit |
$417,000 |
$625,500 |
| 2 - unit |
$533,850 |
$800,775 |
| 3 - unit |
$645,300 |
$967,950 |
| 4 - unit |
$801,950 |
$1,202,925 |
Conventional Loan
A conventional loan is any mortgage loan which is "not" a
VA (Veteran Affairs),
FHA,
RHS or
PIH
loan. This includes conforming, non conforming, jumbo & subprime loans.
Jumbo Loan
Jumbo loans are defined as any loan that falls above the maximum
conforming loan limits set by Fannie Mae and Freddie Mac. These loans
will carry a slightly higher interest rate, although the spread is
determined by current market conditions.
Negative Amortization Loan
These types of mortgages were what many consider to be
the cause of the 2008 crash in the financial market.
Negative amortization happens when the interest rates
climbs to the point where the monthly mortgage payment
doesn't cover the interest payment due, any unpaid interest
is added to your original loan balance, which in turn raises
your loan balance higher and higher every month.
Although you do have the choice of making only minimum
payments, one should think this option over very carefully
as allowing the interest to accumulate on top of the unpaid
balances is one of the many things that helped millions of
homeowners lose their home to foreclosure in the great
2008-2009 recession.
Example:
Your mortgage has a payment cap of 10%. If your payment
is $2,000 per month and interest rates rise, your new
payment would normally be $2,500/mo (for example), but your
capped payment is only $2,200. The other $300 will be added
to your loan balance, making it harder and harder every
month to refinance out of the negative amortization loan, it
simply eats the equity in your home like a monster leaving
few choices.
Negative amortization Option ARMs have only one
advantage, the ability to own more house for a smaller
monthly payment than anyone was previously able to do. The
negative amortization was complete junk as it was only
designed to separate borrowers from their money and designed
by the financial borrowers to keep their leveraged profits
climbing. The huge risk associated with this loan never even
came close to equaling the very small advantages it gave.
Certain ARMs (for instance, Option ARM loans) provide
payment ceilings instead of an interest rate ceiling. This
restricts the amount the monthly payment that is allowed to
increase, but does allow the interest rate to soar above the
monthly payment. If your mortgage loan has a payment cap but
does not have a periodic interest rate ceiling, then the
loan is likely to become negatively
amortized.
With many ARMs, your looking at an interest rate
adjustment every 3-10 years, but with the negatively
amortized mortgage loans you can expect this to adjust
monthly. Many adjustable rate mortgages (ARMs) provide an
initial interest rate lower than the fully indexed rate
during the initial period of the Option Arm loan, which
could be one month or a year or more. It is better known as
the teaser.
ARMs are obtainable with 30-year terms and even a few
with 15 to 40 year terms. Adjustable rate mortgages (ARMs)
by and large
they will have a lower initial interest rate than fixed rate
loans.
Non Conforming Loan
Conforming loans do not fall under the guidelines set by Freddie
Mac or Fannie Mae (GSE's). These loans have a higher loan amount
then allowed for a conforming loan (i.e. they are above $417,000 for 1
unit), and/or there are issues meeting the conforming underwriting
guidelines with any of the following - credit, ratio, source of funds,
employment history, unusual house, etc.
Keep in mind that even though you may still have an A-paper loan, if
you fall into the non-conforming category you will usually end up paying
a 1/4% or higher interest rate than if you were to receive a conforming
loan. These loans which have a smaller market are usually either
sold to private investors or kept in the lenders portfolio which is the
reason for the higher interest rate.
Subprime Loan
Whether a loan falls into the subprime market has to do with a few
different factors, but the biggest is credit. You can have issues
with your income, source of funds, length of employment, etc., but if
your credit score, for what ever reason does not allow you to fall into
the conforming, non conforming category you will likely be looking at a
subprime loan.
As a general rule, any borrower with a score below 590 will almost
certainly be looking at a subprime mortgage. If your score is
between 590 and 620 there is a very good chance you will also be looking
at subprime mortgage loan, but with compensating factors such as a large
down payment, many months of reserves and/or extremely low ratios, you
may be able to procure a prime loan.
These loans as a rule, usually carry a substantial increase in the
mortgage rate and prepayment penalties because of the higher risk for
default versus A-paper/Prime loans.
If you find your only choice is a subprime loan you should look at it
as a short term (2-3 year) solution (most will have a 2-3 year
pre-payment penalty). During this time work hard on cleaning up
your credit and then ultimately refinance into a lower rate loan as
quickly as possible.
Opponents of sub-prime lending allege predatory lending practices
have been an ongoing problem with these loans since there inception.
Those looking for loans that do not qualify for any of the above have
unfortunately little choice but to pay the higher rates and fees because
of the perceived risk to lenders or wait until they qualify for prime
rate loans.
The decisions you make on a sub-prime loan can easily put you in a
worse financial position down the road if great care is not taken, as
these types of mortgages are extremely dangerous.