Thirty-Year Fixed Rate Mortgage
The traditional 30-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, then adjustable-rate loans are usually cheaper. As a rule of thumb, it may be harder to qualify for fixed-rate loans than for adjustable rate loans. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.
Fifteen-Year Fixed Rate Mortgage
This loan is fully amortized over a 15-year period and features constant monthly payments. It offers all the advantages of the 30-year loan, plus a lower interest rate—and you'll own your home twice as fast. The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn't that great.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
These increasingly popular ARMS—also called 3/1, 5/1 or 7/1—can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a "5/1 loan" has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable-rate loan, based on then-current rates for the remaining 25 years. It's a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.
Adjustable Rate Mortgages (ARM)
When it comes to ARMs there's a basic rule to remember...the longer you ask the lender to charge you a specific rate, the more expensive the loan.
2/1 Buy Down Mortgage
The 2/1 Buy-Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long-term rates. However, keeping the loan in place even for three full years or more will keep their average interest rate in line with the original market conditions.
This loan has a rate that is recalculated once a year.
With this loan, the interest rate is recalculated every month. Compared to other options, the rate is usually lower on this ARM because the lender is only committing to a rate for a month at a time, so his vulnerability is significantly reduced.
Negative Amortization (Neg. Am) Loan
This is a deferred-interest loan which is very powerful -- and the most misunderstood mortgage program because of its many options. Basically, the lender allows the borrower to make monthly payments that are less than the accruing interest. Therefore, if the borrower chooses to make the minimum monthly payment, the loan balance will increase by the amount of interest not paid on the loan. The power of this loan lies in the borrower's ability to choose between making the full loan payment, or the minimum payment, or any amount in between. If a borrower's income varies throughout the year (due to commissions, bonuses, etc.), the borrower can make a lower payment during the "lean times", and then make higher payments when funds are readily available.
FHA (Federal Housing)
The Federal Housing Administration (FHA) was created in 1934 to insure mortgage loans on residential property and, by thus protecting lenders against loss, encourages the use of long-term mortgages with high loan-to-value ratios. The Department of Housing and Urban Development (HUD) oversees home ownership, low income housing assistance, fair housing laws, homelessness, aid for distressed neighborhoods, and housing development programs. HUD administers RESPA and FHA.
Remember FHA does not make home loans, however insures against any losses a mortgage lender will incur in case of default. In addition, FHA promotes low to moderate income earners to purchase or refinance the home with extremely favorable terms without any pre-payment penalties or exotic loan products.
Some other highlights of FHA programs are:
- · Minimal down payment requirements needed when purchasing (3% of the sales price is typically needed)
- · No reserves are required for qualifying purposes.
- · Seller can credit up to 6% of sales price towards buyers closing costs.
- · No minimum FICO credit score or credit score requirements (alternative trade lines are used to qualify)
- · Bankruptcies must be seasoned for a minimum of two years
- · Prior foreclosures must be seasoned for a minimum of three years
- · Less than two years work employment is allowed.
- · Self-Employed borrowers are allowed
- · Property must be owner occupied
- · Property types allowed are one to four units residential
- · Loan amounts ranging from $410K for a single family home to $788K for a 4 unit property (depending upon the county).