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Know Your Mortgage
New and existing homeowners are often faced with various challenges when trying to gain access to home loans and favorable mortgage rates. There are several decisions to be made before you can choose the best home loan for you. As a borrower, it is beneficial to understand some basic issues associated with acquiring and maintaining home loans in order to obtain the best mortgage rates.
Understand Your Options
With the recent increase in foreclosure rates, there is confusion among homeowners as to whether their mortgage is at risk. The reality for many of these homeowners is that the responsibility to understand the terms and conditions of a mortgage belongs to the borrower. Before signing a contract that will affect your future, some basic knowledge of the mortgage you are committing to is important! If you are worried that you may be in trouble, read over your mortgage plan a few times and consult with a knowledgeable mortgage broker.
Browse our in-depth guide on various mortgage terms and products to help you choose the most suitable loan option for you. | |
Fixed Rate Mortgages
Fixed Rate Mortgages are home loans with steady interest rates and monthly payments that do not change throughout the life of the loan. The major benefit to having a fixed rate mortgage is that they are structured in a way that payments are the same every month.
Common Fixed Rate Mortgages Include:
- 30-Year Fixed Rate Mortgage
- Biweekly Mortgage
- Convertible Mortgages
- Balloon Mortgages
- Interest-Only Mortgage Loan
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Adjustable Rate Mortgage
Adjustable rate or variable rate mortgage loans have interest rates and monthly payments that fluctuate. With Adjustable Rate Mortgages (ARMs), periodic changes relating to a defined index are made to the interest rate.
Common Adjustable Rate Mortgages include:
- Negatively Amortizing Loans
- Option ARMs
- Hybrid Loans
- Fixed-Period ARMs
- Two-Step Mortgage
- Convertible ARMs
- Graduated Payment Mortgages (GPMs)
- Buydown Mortgage
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Interest Only Mortgage Loans (Non-Conforming)
Interest Only Mortgage Loans (Non-Conforming) are loans that require the borrower to pay only interest on the principle in monthly installments for a fixed period. This period usually lasts for a limited time, after which the borrower has a few options. They can either start paying installments that include both interest and principle, refinance or pay off the entire balance of the mortgage.
Common Interest Only Mortgage Loans (Non-Conforming) include:
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Conforming Loans
A conforming loan is a home mortgage loan that matches the dollar values established by the OFHEO, the Office of Federal Housing Enterprise Oversight, using the average housing prices on an annual October to October percentage change. These loans must meet the lending criteria of Freddie Mac and Fannie Mae.
Jumbo Loans
Jumbo loans, also known as non-conforming loans, are loans that exceed the maximum loan amount established by the Federal National Mortgage Association (Fannie Mae and Freddie Mac). They often have higher interest rates than conforming loans, but the difference may vary depending on the economy.
Second Mortgage
A second mortgage is a loan taken after the first mortgage and is secured against the same assets as the first, the value of the property and home. Based on the amount of equity, interest or ownership for a property; the loan amount is the difference between the current value of a property and the amount that is owed on it.
Second Mortgages are a great way for homeowners to use their homes as collateral and borrow the money they need. These loans were once very restricted and viewed as proof of financial woes. This is no longer the case and there is a wide selection of loans available to fit your specific needs.
Common Reasons for a Second Mortgage:
- Home Improvement Financing
- Tuition Fees
- Debt Consolidation
- Emergencies
Second mortgages normally carry a higher interest rate than a first mortgage. If interest rates are low, then refinancing may be the better option. Still, despite higher interest rates, second mortgages may save money in the long run compared to refinancing because of low transaction costs.
Types of Second Mortgages:- Traditional Mortgage
- Home Equity Loan
- Home Equity Line of Credit
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Subprime Mortgage
Subprime mortgage loans are for borrowers with bad credit and usually carry higher interest rates. Subprime loans also come with prepayment penalties and/or balloon payments. It is important to educate yourself when it comes to subprime mortgages, especially if you have shaky credit. Be sure to investigate your interest rates and determine what you can afford. Certain subprime lenders thrive on naïve borrowers, so it is important that you are not one of them.
Hybrid Loans
Hybrid, or combined loans, consists of a combination of fixed and ARM loans to varying degrees. They begin with an initial fixed rate period and adjust to ARM after the set fixed payment period expires.
Common Hybrid Loans include:- Fixed Period ARMs
- Two-Step Mortgage
- Convertible ARMs
- Graduated Payment Mortgages (GPMs)
- Buydown Mortgage
100% Financing
100% financing mortgage loans allow you to buy a home with almost no money down. This is an excellent plan if you have great credit but limited amounts of funds to commit to a down payment. The mortgage will usually come in 2 parts. First, a mortgage for 80% of the home's cost followed by a piggyback loan, or second mortgage, for the remaining 20%. The first mortgage can either best fixed or adjustable. The second mortgage is typically a home equity line of credit. |
Conventional and Government Loans
Government loans are all insured at a federal level. There are two types of loans: conventional and government. All loans except FHA, VA and RHS loan programs are considered government loans.
Common Conventional and Government Loans include:- State and Local Housing Programs
- FHA Loans
- VA Loans
- RHS Loan Programs
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