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Mortgage Loan Programs

There are many types of mortgage loans out there. Certain loans cater to specific situations, where others are more general. The types of loans discussed below are fixed-rate, adjustable-rate, jumbo mortgage, two-step mortgage, bi-weekly mortgage, balloon mortgage, assumable mortgage, sub prime mortgage, construction mortgage, and seller financing. You should discuss with your realtor or your lending institution on what loan options are available to you as well as which ones best fit your situation.

Fixed rate

Fixed-rate loans require that you pay a set amount each month. The duration of the loan is usually 15- or 30-years. This is the most common type of mortgage.

Why they are in demand:

• The payments are uniform and regular. They don't have to worry about fluctuating interest rates.
• Fix-rate mortgages become even desirable when interest rates are low.

When getting a fixed-rate loan, you need to decide if the life of the loan will be 15 or 30 years. Keep the following in mind when picking the duration of your loan.

30-year fixed rate pros

• Interest rates can change a lot in 30 years. This frees the borrower from worrying about fluctuating interest rates that can affect monthly payments.
• Because the interest is repaid over a longer period of time, the monthly payments are lower than a 15-year loan.
• Because of the lower monthly payments, there is more money available to put into other investments.
• Having a larger interest bill, you can make a larger tax deduction. This could greatly reduce, or eliminate, what you have to pay in federal income tax.

30-year fixed rate cons

• Because the initial payments go to paying off the interest incurred, equity builds slowly.
• Because the loan has a longer duration, the borrower pays more in interest than a 15-year loan.
• 15-year loans have lower interest rates.

15-year fixed rate pros

• Since you repay the loan faster that a 30-year loan, equity builds quickly.
• 30-year loans will have higher interest bills.
• 15-year loans have a lower interest rate than loans that last longer.

15-year fixed rate cons

• You might have to pay more monthly that with a 30-year loan.
• A longer-term loan might allow the buyer to borrow more and get a larger home.

Adjustable Rate

Adjustable-rate mortgages (ARM's) have an interest rates and monthly payments that change according to the state of the market. Many ARM's will have a fixed-rate in the beginning. After this period is up, the interest changes at predetermined times. Adjustable rates start low.

During the time that the ARM is in its fixed-rate period, the interest is usually that a standard fixed-rate mortgage. This can entice borrowers to go with an ARM. However, be aware that once the ARM's fixed-rate period is over, you are taking a larger risk on future interest rates and monthly payments.

These crossbreed ARMs can be know as 3/1, 5/1, 7/1 or 10/1. The loan will have a fix-rate period for the first three, five, seven or ten years. After this period is over the interest rate and payments will be amended each year.

After the specified fixed-rate period, an ARM's rate will change in accordance to the index that has been laid out at closing. After learning the index amount, a margin will be added, and then the new monthly payment and rate are recalculated. Rates and payments are recalculated at the beginning of each adjustment period.

There is a Limit

To protect borrowers against severe market fluctuations, ARM's have a cap. This limits the quantity that payments and ARM rates can be adjusted.

Some standard caps include:

• Periodic rate cap - These caps keep the interest rate in check during a given time period, often annually. The percentage points are not allowed to change more than the amount stated each year.
• Lifetime cap - These caps limits the interest rate in regards to how much the rate can increase during the loans term.
• Payment cap - This cap limits the amount a monthly payment can increase over the duration of the loan. This cap limits in a specific dollar amount rather than using percentage points.

More Mortgage Options

There are many ways to secure a mortgage. Most borrowers don't realize the scope of their options when they start looking for a mortgage loan. Even within just fixed-rate mortgages and ARM's, there are lots of variations to choose from.

Home financing options also have a large selection of possibilities to think about. The following are some additional mortgage options, not a complete list.

City Mortgage Program

First-time homebuyers are eligible for a 4% grant from the City of Chicago to cover closing costs and the down payment. (Lender receives 1.5%)

• 30-year, fixed rate mortgage at below market rate
• Offered for both target and non-target areas
• Buyers can only use the grant for purchase of a primary residence, not a second home or investment properties
• Closing must occur within 60 days
• Borrower is required to attend in a homeowner education class
• City will review homebuyer’s tax returns for the past three years
• Purchase Price and Income limits apply

This is a Bond Program. Funds are issued to support the loans, which means as soon as the available funds are distributed, it is necessary to wait for additional funding.

Jumbo Mortgage

This loan is nonconforming. It will have higher interest rates than a conforming loan. Also, it's not as safe of an endeavourer as standard loans are. Jumbo Mortgages go beyond the loan limit put in place by Freddie Man and Fannie Mae. These corporations are two of the largest buyers of mortgage loans in the country. This guarantees that the money is obtainable anywhere in the county at any time. In 2003, the limit on a loan for a single family was $322,700. Hawaii, Alaska, and the Virgin Islands' limit were 50% higher.

Pro: Gives borrowers the chance to purchase homes that cost more and are larger in size.
Con: The lender's risk is higher, so borrowers will pay higher interest rates to compensate.

Two-step Mortgage

This type of mortgage combines features from adjustable- and fixed-rate mortgages. This offers an initial fixed-rate, followed by an adjustment, then back to a fixed-rate for the duration of the loan's life. So, a 5/25 two-step mortgage would have a five year fixed rate, an adjustment, then 25 more years fixed payments at the adjusted rate.

Pro: Helps borrowers with poor or damaged credit build their credit back up.
Con: You could get trapped in a high-rate mortgage loan for a long period of time, if the condition of your credit doesn't recover.

Bi-Weekly Mortgage

This type of mortgage has you making payments every two weeks, not once a month. The mortgage has a fixed rate.

The premise behind bi-weekly mortgages is to reduce the term of a 30-year mortgage. You will divide your monthly payments in half. That is the amount you will pay every other week. This ends up being 26 payments a year. Adding up the payments means that you are actually making yearly payments that are equivalent to 13 months. The payment in the "13 th month" gets deducted from the principle balance. This will dramatically reduce the loan's life. For example, through this method you can reduce a 30-year loan to one that is paid off in 23. When switching to bi-weekly payments, make sure your lender will accept this kind of payment and properly credits the 13 th month payment to the principal amount.

Pro: This could be a good option if your get paid twice a month.
Con: Can be more ridged if you come upon some financial hardships in the future. This is due to the proximity of the payments.

Balloon Mortgage

The incentive of balloon mortgages is that, for a time period, a borrower will be given a lower rate and lower payments. This usually ranges between three and ten years. After this time, the principal balance is required to be paid off in the form of a lump sum.

Sometimes, the mortgages are allowed to be converted into an adjustable-rate or fixed-rate loan. Before they reach their endpoints, a large number of borrowers either refinance their remaining balance or sell the home.

Pro: If you're not expecting to remain in a home for a long time, this could help reduce your primary loan costs
Con: If you stay in the home longer than expected, you might incur additional costs. In addition you would have to either refinances sooner, or have to pay off the remaining balance.

Assumable Mortgage

Relatively rare, assumable mortgages equip the homeowner with the ability to "pass on" the balance of the loan to the buyer rather than having to pay it off using the money earned from the sale of the home. It is recommended that you buy an assumable mortgage when the interest rate is low. Should the rates rise, it will prove less expensive than any bank or other sourced loan. Buyers will then want to "take on" your loan. They might even offer to pay more for the property in return for the lower rate.

Pro: Monthly payments can be lower as well as closing costs.

Con: The seller can raise the price of the home. There will be a larger gap between the loan balance and the asking price. Buyers will need to have more money available to afford this.

Sub prime Mortgage

Not necessarily, the best deal around. Sub prime mortgages are the often the only deal for those want-to-be home-buyers with not-so-great credit. By paying up, persons can obtain loans that have higher interest rates and have stricter conditions than a conventional loan. For those who felt a mortgage was not an option, the sub prime option, in addition to helping them become homeowners, can also aide in helping them to successfully rebuild their credit.

Pro: Bona fide savior for those who have been bankrupt, have too much credit, need a high loan-to-value property ratio, have a low credit score, or are not able to prove your income.

Con: It can be very inconsistent. There are a variety of different fees and rates. It is still important (quite possibly even more so) for borrowers to shop diligently to find the best rate available to them.

Construction Mortgage

These loans are for people who would rather build a new home than purchase an existing home. There are two stages to this type of mortgage. Since they need to draw money to pay builders, interest rates are higher during the construction phase. Once the home is built, borrowers then undergo another closing. At this point the loan changes to a conventional fixed-rate mortgage.

Seller Financing

This type of financing is where the homeowner extends credit to the buyer. Instead of making payments to a bank, seller financing entails the buyer to directly pay the seller on a monthly basis. The property serves to secure the promissory note and an assumable mortgage is often included.