Types of Loans
Below, you will see a brief description of the many types of mortgage loans. Some of them are not used as much as others.
This just a small sample of the available loan programs that we have to offer. We understand that each borrower is unique and that is why we strongly encourage our clients to meet with us for a free mortgage consultation to make sure the loan program that you choose is the one that best fits your family and financial situation.
A loan in which the amount borrowed is less than or equal to $417,000 (this number could be different depending on the bank) .
A loan in which the amount borrowed is greater than $417,000 (this number could be different depending on the bank) .
Fixed Rate Loans
This type of loan has monthly payments that remain the same for the entire loan term after which time the loan is paid in full. The monthly payment is based on an interest rate which does not change over the term of the loan (hence the term "fixed rate"). Fixed rate loans are typically 30, 15 & 20 year terms.
Adjustable Rate Mortgage (ARM)
The interest rate on an ARM may vary up or down at fixed intervals. The changes are tied to a financial index such as one year Treasury notes. The ARM often offers a low beginning interest rate as a "teaser". However, this rate will go up after a certain time. If interest rates are low, an arm may be a good option. This is especially true if its cap (the highest interest you may be charged) is not more than a few points higher than the current interest rate. ARMs are of special interest to buyers who know their income will rise in the future or who don't plan to own the home for many years. Arm Loan Programs are available for a variety of terms. Typical terms are 1, 3, 5 and 7 years.
Interest Only Loan
A mortgage is "interest only" if the monthly mortgage payment does not include any repayment of principal for some period. The payment consists of interest only. During that period, the loan balance remains unchanged.For example, if a 30-year fixed-rate loan of $100,000 at 8.5% is interest only, the payment is .085/12 times $100,000, or $708.34. Otherwise, the payment would be $768.92. This is the "fully amortizing payment" - the payment that, if maintained over the term of the loan, will pay it off completely. The interest only loan thus reduces the monthly payment by 7.9%. A loan that is interest-only for the full term would not amortize. The loan balance would be the same at term as it was at the outset. Back in the twenties, loans of this type were the norm. Borrowers typically refinanced at term, which worked fine so long as the house didn't lose value and the borrower didn't lose his job. But the depression of the thirties caused a large proportion of these loans to go into foreclosure. Lenders stopped writing them and have never brought them back. They want loans that eventually amortize. Hence, the interest only loans of today are interest only for a specified period, such as 5 years. At the end of that period, the payment is raised to the fully amortizing level. In such case, the new payment will be larger than it would have been if it had been fully amortizing at the outset. Suppose, for example, the interest only period on the loan described above is 5 years. Then the payment starting in month 61 would be $805.23. To reduce the payment by $60.58 for the first 5 years, the borrower would pay an additional $36.31 for the next 25. The longer the interest only period, the larger the new payment will be when the interest only period ends. If the same loan is interest only for 10 years, for example, the fully amortizing payment beginning in month 121 is $867.83. To reduce the payment by $60.58 for the first 10 years, the borrower would pay an additional $98.91 for the next 20. Interest only mortgages are for borrowers who want a lower initial payment, and have some confidence that they will be able to deal with a payment increase in the future.
This type of loan has fixed monthly payments for the balloon term of the loan that are based on a 30 year repayment schedules. At the end of the balloon term, the outstanding principal balance of the loan is due plus any unpaid interest. This loan program generally has a refinance option at the end of the balloon period that gives the borrower the option to extend the loan at a fixed rate for the remaining term. Balloon loans are typically 5 and 7 year terms.
3-2-1- Buy down Loan
This type of loan program is based on an interest rate (actual rate) that does not change over the term of the loan and has fixed monthly payments that are based on a 30 year repayment schedule. However, the monthly payments that are made during the first 36 months (three years) are calculated based on an interest rate that is less than the actual rate. The first 12 monthly payments of the loan are calculated based on an interest rate that is 3% less than the actual rate. For the second year of the loan, payments 13 through 24 are based on an interest rate that is 2% less than the actual rate of the loan. For the third year of the loan, payments 25 through 36 are based on an interest rate that is 1% less than the actual rate. After the third year, the monthly payments to be made over the remaining 27 years of the loan are based on the actual rate.
This type of loan is typically used to help borrowers who are unable to qualify for a loan at current interest rates. By "buying down" the interest rate, the borrower decreases the initial monthly payments that are required to be made which increases the borrower's ability to qualify for the loan. The cost of "buying down" an interest rate for a period of time is generally determined by calculating the difference between (a) the total monthly payments that would have been made during the buy down period if the loan did not have a buy down feature and (b) the total monthly payments to be made during this same period with the buy down feature in place. This amount is generally paid for at time of closing by the Lender or the Seller, depending on how it is structured.
B/C Credit Loan
These types of loans are available to borrowers who have or have had credit problems such as being late on or defaulting on the repayment of loans or credit cards. Although such loans are available as fixed rate or adjustable rate mortgage loans, the interest rate and/or costs associated with such loans are generally higher than loans available to borrowers who do not have a history of credit issues to reflect the fact that the risk associated with such loans is generally higher. Borrowers who do not have a history of credit issues are said to have "A" credit. Those with a history of credit issues are said to have "B", "C" or "D" credit depending on the severity of the credit issues.
No Income/No Asset Verification Loan
This type of loan is a No Income Verification Loan and a No Asset Verification Loan. It is used by borrowers who do not wish to or are unable to verify their income and their assets. Once again, the interest rate and/or costs for such loans may be slightly higher than normal to reflect the higher degree of risk involved in loaning to borrowers without verifying their income or assets. Such risk is offset by borrowers who have an excellent credit history.
This type of loan is used to finance the construction of a home. It may or may not also include the purchase of the land upon which the home is to be built. Unlike a mortgage loan where the entire amount of the loan is disbursed to the borrower at the time the loan transaction is consummated, a construction loan involves a series of disbursements which are linked to a construction schedule. Some construction loans have fixed interest rates, others have variable interest rates. In addition, some construction loans automatically convert to a regular mortgage (referred to as "permanent" financing) once construction has been completed, while others require another loan transaction to take place so the borrower can payoff the construction loan and obtain permanent financing.