Types of Mortgages - Mortgage Loan Type

This website is dedicated to finding you the best available home mortgage offers and bringing them all together in one place for your convenience. Whether you are searching for the best rates for home loans, home equity, or refinancing, you can be assured you will find them here. When searching for the best lenders for home mortgage loans, you may want to fill out a mortgage application form from more than one of the companies listed below. The mortgage application forms are simple and should only take a few minutes to complete. Some of these broker companies will actually compete with one another to provide you with the lowest mortgage interest rates. Apply to a number of lender to find great home mortgage deals today!
The seller accepted your offer and the mortgage lender approved your home loan application. So what type of residential mortgage do you pick given the choices available in the market today? There are quite a few considerations: What is your future earning potential, how long do you plan to keep the house and where do you think mortgage interest rates are going. Finally, how big should your mortgage loan be? The basic rule is the annual upkeep of your property (mortgage payments, utilities and insurance) should not exceed 30% of your gross annual income. Read on to find which home loan is the best mortgage suited for you.

Fixed Rate Mortgage
This is the most common type of residential home loan. The mortgage loan is repaid through fixed monthly payments of principal and interest over a set term. The borrowing rate stays the same over the life of the residential mortgage loan. The term of the home mortgage can be 10, 15, 20 or the popular 30 year fixed rate mortgage term. The way fixed mortgage loans are structured, the mortgage interest is front loaded. In the first years of the residential loan, the bulk of the monthly payments go to paying mortgage interest. It’s only later that you will start significantly building equity in your home as more of your mortgage payments go towards paying down the mortgage loan principal. A fixed rate mortgage is ideal for those who intend to stay in their properties for a long time.

The Advantages
Stability: With your mortgage rates fixed, the loan period set, you know what your mortgage payment will exactly be for the whole life of the residential loan. Given the certainty of your mortgage loan payment, you can plan your finances accordingly.
Lower payments in a low mortgage interest rates environment: A lower monthly mortgage payment frees up your purchasing power and gives you greater financial flexibility. Using a 30 year fixed mortgage of $150,000 as an example, if the borrowing rate is 6.50%, the monthly payment would be $948.10. If the mortgage interest rate is 8.50%, the mortgage monthly payment would amount to $1,153.37. The difference in monthly payments is $205.27.

The Disadvantages
Affordability: If mortgage interest rates are high, you might have difficulty making the high mortgage payments. The home loan in this situation might not be approved.
High payments in a high mortgage rate environment: Nobody wants to be saddled with high home mortgage payments over the long term. When borrowing rates are lower, you can refinance your mortgage. A refinance mortgage is the process of replacing your current mortgage with a new residential mortgage with better borrowing terms.
 

The Adjustable Rate Mortgage (ARM)

The adjustable rate mortgage is usually referred to as an ARM. An arm adjustable rate mortgage is a combination of a fixed rate mortgage and a floating rate mortgage. At the beginning of the mortgage term, the mortgage rate is fixed for certain periods. These periods could be for 3, 5, 7 or 10 years. After this period expires, the mortgage interest rate becomes adjustable.
A popular ARM home loan is the 5 1 ARM Mortgage. Five denotes that the period and the borrowing rate are initially fixed for 5 years. After the fifth year, the mortgage rate becomes adjustable.
Conversion Options: Some ARM home loans come with options to convert them to a fixed rate mortgage based on a pre-determined formula, during a given time period. Example: the 1-year treasury bill adjustable may be converted to a fixed mortgage rate during the first five years on the adjustment date. Meaning, you have the option to convert during the 13th, 25th, 37th, 49th and 61st months of the mortgage loan.

The Advantages
Teaser Rate: This is the starting interest rate of the arm adjustable rate mortgage. It is usually referred to as the teaser rate, since it is lower than the fully indexed rate. The initial low mortgage rate is used to attract people. An arm mortgage is ideal for people who intend to stay in their homes for no more than 5 to 7 years. The benefits of an arm are realized at the beginning.
Affordability: If current mortgage rates and housing prices are high, this may be the only home loan option available to you. You may have a better chance of getting the home loan since the lender incorporates the gross monthly income and the monthly loan payment amount to determine how much you qualify. The monthly amount will be less with a lower interest rate so you might qualify for more.
Interest rates have peaked: By going with an adjustable rate mortgage arm at the peak of the interest rate cycle, the successive rates will be lower as interest rates go down. Your monthly home mortgage payments will be lower.

The Disadvantages
Complicated to understand: Unlike a fixed rate mortgage that is simple to understand, there are many variables that go into calculating adjustable rate mortgage loans.
Interest rates have bottomed out: By going with an adjustable rate mortgage arm at the bottom of the interest rate cycle, successive borrowing rates will likely go higher as interest rates go down. Your monthly mortgage payments will become less affordable.
Uncertainty: If you plan to be at your property for more than 7 years, you will be dealing with the uncertainty associated with an ARM mortgage. After each adjustment period, you will bet getting new mortgage payments.

Interest Only Mortgage

An interest only home mortgage features no payments of principal made at the beginning of the home loan. The monthly payments consist only of mortgage interest only. Due to the lower monthly mortgage payments, you qualify for a bigger residential loan. An interest only home mortgage allows you to buy more home while keeping your monthly mortgage payments low.
Not Interest Only For The Whole Mortgage Loan Term
The interest only payments do not go on for the whole term of the home loan mortgage. Interest only mortgage payments periods range from 1 year up to half the term of the mortgage loan. Interest only loan mortgages are available in adjustable rate mortgage format and fixed mortgage format.
Bigger Monthly Mortgage Payments
After the interest only payment is over, you will begin making payments on your mortgage principal. Your monthly mortgage payment will go up considerably. For example, you took out a 15/30 year interest only mortgage. After the 15th year, the principal balance will be amortized over 15 years. With a $175,000 home loan with a mortgage borrowing rate of 6.50%, the interest only monthly payment is $947.92. When the principal payments kick in after the 15th year, the mortgage monthly payment jumps to $1,524.44.

The Advantages
Lower mortgage payments: The lower monthly mortgage payments let you purchase a home where a fixed mortgage loan would not.
Free up cash to invest the money elsewhere: Instead of using the cash to pay down your mortgage principal, you can invest in other vehicles such as stocks and mutual funds to generate a superior return.

The Disadvantages
Income Risks: There are no assurances that your income will rise fast enough to cover the higher monthly mortgage payments.
Property Risks: Instead of the property rising fast enough to pay off your interest only home mortgage, it could stay at current levels or even drop. As a result, you might require another loan just settle the interest only mortgage loans.
No guarantee of getting superior returns in other investments: If you used the money to generate returns in investments such as equities and mutual funds, there is no guarantee you’ll make money.

Biweekly Mortgage
Mortgage payments are made every two weeks. The amount paid is half of what your monthly mortgage payment would be. On an annualized basis, there are two extra payments in a year. You will be making 26 biweekly mortgage payments instead of 24 payments.
Save Thousands On Mortgage Interest And Pay Off Your Mortgage Quicker
A bi weekly mortgage program has you paying down your principal mortgage earlier. As a result, you’ll save significant amounts in mortgage interest and pay off your home mortgage years earlier.
Example: 30 year fixed mortgage $175,000 Interest Rate: 6.75%
By opting for a bi weekly mortgage payment plan for this mortgage, you will be saving $54,257.52 in mortgage interest. Your mortgage will be paid off 5 years 9 months earlier.

Two Step Mortgage

A two step mortgage is essentially a 30 year mortgage with special features: Convertible or non-convertible. These mortgage loans are also known as 5/25s and 7/23s. The 5/25s has a fixed interest rate for the first five years and then switches to either a 25 year fixed mortgage rate or a 1 year adjustable mortgage rate. The 7/23 has a fixed interest rate for the first seven years and then converts to a 23 year fixed or a 1 year adjustable. The starting home loan rate is lower than a 30-year fixed. However, it is higher than a 1-year ARM mortgage. This type of residential mortgage is less risky than a mortgage ARM initially since the adjustment interval is longer.

Federal Housing Authority (FHA) Mortgage

A FHA mortgage is a residential loan insured by the FHA that is part of the U.S. Department of Housing and Urban Development (HUD). FHA loans have lower mortgage down payment requirements and were easier to qualify for than conventional loans. The goal of the FHA is to make housing affordable and stimulate demand.
The best feature of an FHA loan is the low down payment. FHA loans are also assumable so you can take over from the property seller if you qualify. This could save you significant amounts of money and hassles. The FHA mortgage loan amounts are determined by the median prices of different cities within a specific region.
 

Veterans Affairs Loan

The U.S. Department of Veterans Affairs guarantees mortgage loans for veterans and service persons. It does not underwrite the residential loans. The guaranty allows veterans to get home mortgage loans with good borrowing terms, usually with little or no down payment.
To be eligible for the VA loan, you must have served 180 active days service since September 1940. If you enlisted after September 7, 1980 you need to have two years of service. You do need to get a certificate of eligibility from the Department of Veterans affairs as proof of service.
Veterans are not permitted to pay points to the mortgage lender on these types of mortgage loans. You can prepay a VA loan without penalty and the residential loan is assumable, meaning the property buyer can take over the mortgage if the property is sold. This feature can save a buyer significant amounts of money in mortgage interest payments. The buyer still needs to meet the requirements of the current mortgage banker. The homebuyer takes over payment on the existing mortgage and pays the difference between the mortgage balance and the selling price. You should always verify first whether the mortgage home loan you are securing is assumable.
 

Refinance

If you are considering refinancing your home, there are several factors you should think about before making your decision. These factors include the interest rate on your current mortgage, the current market interest rate, how long you plan to live in your current home, and whether or not you need money for other things (such as home improvement, a new car loan, or paying off credit cards).
If you have several outstanding bills, you may want to consider  refinancing your home and in turn, consolidating and paying off your other debts. If you have equity in your home, you may be able to access that equity through a "cash out" refinance. You could choose to apply that equity to a debt consolidation plan, a new car, or home improvements
If you are considering refinancing, also remember that there are a variety of different mortgages.  If you plan on living in your home for a long period of time, you may want to consider the traditional fixed-rate 15- or 30-year loan. Another option is to choose an adjustable rate mortgage and consider refinancing again in a few years. By refinancing, you can choose the perfect mortgage for your needs, which may have changed since you first bought your home.
Consider the interest rate you are now paying before refinancing. Compare it against the current interest rate to see how much you would save by mortgage refinancing.
Mortgage lenders usually advise that when interest rates drop by two percent, refinancing becomes advantageous. This two percent figure is only a rough guideline, every situation will be slightly different. There are expenses involved with a refinance, although by taking advantage of the lower interest rates, your payments become lower and overall payback amount is less; so each refinance situation will have a slightly different break-even point after which it would produce a benefit.
Typically, most of the expenses and standard closing costs you face with a first mortgage will also be present with a refinance. No-cost refinance loans are available, although they typically carry a higher interest rate than a refinance would otherwise carry.
There are several reasons to refinance, although taking advantage of lower interest rates is a big one. Another reason to refinance a mortgage is to convert from an adjustable rate mortgage to a fixed rate mortgage, or to convert to a shorter term loan to save on overall interest charges. Some people may also wish to refinance a mortgage to obtain cash from existing equity.
When deciding whether or not to refinance, there are two things to calculate. Your monthly savings is an important figure, this is simply the difference between the old mortgage and the new one. The other figure is the overall total cost of refinancing. Consider the break-even point as well: this is the total cost of refinancing, divided by the monthly savings. For example, if it will cost you $2,000 to refinance a mortgage, and your monthly savings are $100, your break-even point is 20 months. Assuming you presently have $2,000 to spare, and you will live in the home for more than 20 months, then the decision to refinance may indeed be a prudent one.