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Types of Mortgage Loans and Loan Programs
At Allsales Mortgage our FL loans and loans for other states are easy to qualify for and our interest rates are competitive. We listen to your individual situation and custom-tailor the right loan program to meet your needs. Following are descriptions of the types of mortgage loans available and sample loan programs to help give you an idea of what you might be looking for. To help you further, talk with a qualified mortgage consultant at Allsales Mortgage by calling our office today.
Types of Mortgage Loans
Conventional Loans
Conventional loans may be conforming and non-conforming.
• Conforming Loans
Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These two stockholder-owned corporations purchase mortgage loans complying with the guidelines from mortgage lending institutions, packages the mortgages into securities and sell the securities to investors. By doing so, Fannie Mae and Freddie Mac, like Ginnie Mae, provide a continuous flow of affordable funds for home financing that result in the availability of mortgage credit for Americans.
Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Fannie Mae and Freddie Mac announce new FL loan limits every year. The 2005 conforming loan limits for first mortgages are:
One-Family $417,000
Two-Family $533,850
Three-Family $645,300
Four-Family $801,950
Properties with five or more units are considered commercial properties and are handled under different rules.
• Jumbo Loans (Non-Conforming)
Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as 'jumbo' loans. Because jumbo loans are bought and sold on a much smaller scale, they often have a little higher interest rate than conforming loans, but the spread between the two varies with the economy.
• B/C Loans
Loans that do not meet the borrower credit requirements of Fannie Mae and Freddie Mac are called 'B', 'C' and 'D' paper loans vs. ‘A' paper conforming loans. B/C loans are offered to borrowers that may have recently filed for bankruptcy, foreclosure, or have had late payments on their credit reports (and therefore have a low FICO score). Their purpose is to offer temporary financing to these applicants until they can qualify for conforming ‘A' financing. The interest rates and programs vary, based upon many factors of the borrower's financial situation and credit history.
Loan Programs
Fixed Rate Mortgages
With a fixed rate mortgage loan the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 30, 25, 20, 15 and 10 years. Generally, the shorter the term of a loan, the lower the interest rate is.
1. 30 Year Fixed Conforming
- Strengths: This program provides long-term rate security.
- Weaknesses: Often the highest rate program, this may be more rate security than the owner will ever need.
- Comments: This is a good program if the owner does not plan to move or refinance for more than 10 years and if rates are historically very low. It makes sense to purchase points if the borrower plans to be in the property for at least 4 ½ years.
2. 15 Year Fixed Conforming
- Strengths: This program provides rate security for 15 years. Rates are often a ½% better than the 30 year fixed. With this FL loan, more of your monthly payment is applied to principal and less to interest. You build equity at twice the pace of a 30 year loan without making double the payment.
- Weaknesses: The borrower will qualify for a smaller loan amount than for the 30 year amortized programs.
- Comments: If building equity is your goal and you would rather save money on interest than buy a more expensive home, the 15 year is the program for you.
30 and 15 year mortgage terms are the most popular. With the traditional 30-year fixed rate mortgage your monthly payments are lower than they would be on a shorter-term loan. But if you can afford higher monthly payments a 15-year fixed-rate mortgage allows you to repay your FL loan twice as faster and save more than half the total interest costs of a 30-year loan.
3. Balloon Loans
- Strengths: The interest rate on balloon loans is generally lower than 30- and 15- year mortgages resulting in lower monthly payments.
- Weaknesses: At the end of the term you will have to come up with a lump sum to pay off your lender, either through a refinance or from your own savings.
- Comments: Balloon loans are short-term fixed rate loans that have fixed monthly payments based usually upon a 30-year fully amortizing schedule and a lump sum payment at the end of its term. Usually they have terms of 3, 5, and 7 years. Balloon loans with a refinancing option allow borrowers to convert the mortgage at the end of the balloon period to a fixed rate loan -- based upon the outstanding principal balance -- if certain conditions are met. If you refinance the FL loan at maturity you need not be re-qualified, nor the property re-approved. The 5/25 and 7/23 are the most popular balloon terms.
4. 30 Year Non Conforming (Jumbo)
- Strengths: This program provides long-term rate security.
- Weaknesses: Rates are higher than even the 30 year fixed conforming, which makes this a very expensive mortgage compared to Jumbo ARM's.
- Comments: This is a good program for the security conscious and those with fears of rising rates, but not usually a good way to save money.
5. 15 Year Non Conforming (Jumbo)
- Strengths: this program offers rate security for 15 years. Rates are often a ½% better than the 30 year. More of your payment goes to principal and less to interest. You build equity at twice the pace of a 30 year loan without making double the payment.
- Weaknesses: The borrower will qualify for a smaller loan amount than for 30 year amortized programs.
- Comments: If building equity is your goal and you would rather save money on interest than buy a more expensive home, the 15 year is the program for you.
Adjustable Rate Mortgages
Variable or adjustable rate loans have an interest rate that fluctuates over the period of the FL loan and therefore monthly payments that fluctuate also. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time you apply for the loan.
Well known indexes include:
- 11 th District Cost of Funds Index (COFI)
- 12-Month Treasury Average (MTA)
- Certificate of Deposit Index (CODI)
- Constant Maturity Treasury (CMT)
- Cost of Savings Index (COSI)
- Fannie Mae's Required Net Yield (RNY)
- London Inter Bank Offering Rates (LIBOR)
- Prime Rate
- Treasury Bill (T-Bill)
Your new interest rate is equal to the index plus a margin. The margin is fixed percentage points added to the index to compute the interest rate. The result will then be rounded to the nearest one-eighth of a percent. The margins remain fixed for the term of the loan and are not impacted by the financial markets and movement of interest rates. Lenders use a variety of margins depending upon the loan program and adjustment periods.
Most ARMs have an interest rate cap to protect you from enormous increases in monthly payments. A lifetime cap limits the interest rate increase over the life of the loan. A periodic or adjustment cap limits how much your interest rate can rise at each adjustment (for example if your rate changes annually).
With most ARMs, the interest rate can adjust every six months, once a year, every three years, or every five years. The interest rate on negatively amortized loans can adjust monthly. A loan with an adjustment period of 6 months is called a 6-month ARM, with an adjustment period of 1 year is called a 1-year ARM, and so on. All ARMs are available with 30-year terms and some with 15-year terms.
Adjustable rate mortgages generally have a lower initial interest rate than fixed rate loans, and most ARMs offer an initial lower interest rate than the fully indexed rate (index plus margin) during the initial period of the FL loan, which could be one month or a year or more.
1. 1 Year Adjustable
- Strengths: This program provides the lowest rate for the first year out of the available programs.
- Weaknesses: This is a risky program for the long term considering the rate can increase by as much as 6%.
- Comments: This is a great program for those who are going to be in a home for three years or less, those who plan on making more money over the next few years and those looking to refinance within the next three years. This is not a good program if you think rates are going to increase over the next few years.
Note: 30 year amortization. Rate adjusts every year based on 1 year treasury plus a margin. Caps are 2% per year and 6% for the life of the loan.
2. 3/1 Adjustable
- Strengths: This program offers the l owest qualifying rate of all loans and allows the borrower to qualify for the largest loan. This is a good combination of fixed rate security and low starting rate.
- Weaknesses: Three years fixed may not be enough security for some who are cautious borrowers.
- Comments: This is a great program for Non Conventional Jumbo loans and for those who plan on being in a home for 3 to 5 years. This is also a good program for anyone who believes that rates will be lower at some point in the next five years.
Note: 30 year amortization. Rate is fixed for three years then adjusts each year based on the 1 year treasury plus a margin. Caps are 2% per year and 6% for the life of the FL loan.
3. 5/1 Adjustable
- Strengths: The five year lock in period on this program offers as much security as most borrowers use (The national average life span of a loan is 4.7 years) and at a noticeable savings over the 30 year fixed. The 5/1 program usually has a lower par rate (a rate with 0 points) than the 5/25 Balloon and a better rate after the 5th year of the loan.
- Weaknesses: Five years fixed may not be enough security for some who are cautious borrowers.
- Comments: This is a great program for borrowers (Jumbo especially) who want the added security of a longer fixed rate term but still want to save money over a 30 year period.
Note: 30 Year Amortization. Rate is fixed for five years then adjusts each year based on the 1 year treasury plus a margin. Caps are 2% per year and 6% for the life of the loan.
4. 7/1 Adjustable
- Strengths: At times this program has a lower rate than the 30 Year fixed.
- Weaknesses: The spread between the 30 year fixed and 7/1ARM is usually not that dramatic.
- Comments: This may be right for you if you plan on being in your loan for seven years or less, want a low rate, and are insistent on an ARM.
Note: 30 Year Amortization. Rate is fixed for seven years then adjusts each year based on the 1 year treasury plus a margin.
5. 5/25 Balloon
- Strengths: This program has a low rate with 5 year fixed rate security. This is a great program for the borrower planning on paying off the loan or relocating in five years or less. This program can have extremely low rates with modest point buy-down.
- Weaknesses: Five years fixed may not be enough security for some who are cautious borrowers.
- Comments: T his is a great program for borrowers (Jumbo especially) who want the added security of a longer fixed rate term but still want to save money over a 30 year period.
Note: 30 Year Amortization. Rate is fixed for five years then adjusts one time based on the 60 day FNMA bond rate plus a margin.
6. Negatively Amortizing Loans
Some types of ARMs offer payment caps rather than interest rate caps, which limit the amount the monthly payments can increase. If a loan has a payment cap but has no periodic interest rate cap, then the loan may become negatively amortized. However, you always have the option to pay the minimum monthly payment, or the fully amortized amount due.
- Strengths: You can control cash flow (relatively stable payment), take advantage of low interest rates relative to the market at any given time, and pay back the money borrowed today at a depreciated value years from now (because of natural inflation).
- Weaknesses: If the interest rates rise to the point that the monthly mortgage payment does not cover the interest due, any unpaid interest will get added to the loan balance, so the loan balance increases. If not careful with this type of loan, you could end up owing more for your home than your home is worth and become upside-down in the FL loan.
- Comments: This is a great tool for homeowners as long as you understand the mechanics of what's going on.
7. Option ARM Loans
This is a highly creative product that does not require a set payment each month. After the first payment, you get four payment options to choose from each month: your lender sends you a monthly statement offering a minimum payment (1), interest-only payment (2), 30-year amortized payment (3) or 15-year amortized payment (4).
- Strengths: This is the most flexible program available because it offers so many payment options, and also allows you the most control over your loan.
- Weaknesses: If you always choose the minimum payment and the rates rise, you run the risk of the loan becoming negatively amortized.
- Comments: This product is great for someone whose income fluctuates monthly or whose income will increase, because you are offered choices in your payment each month.
Combination Loans
At Allsales Mortgage we also have the capability of combining fixed rate and adjustable rate mortgage loans to create the best combination for our clients. Following are some of the variations available.
1. Fixed-Period ARMs
With fixed-period ARMs homeowners can enjoy from three to ten years of fixed payments before the initial interest rate change. At the end of the fixed period, the interest rate will adjust annually. Fixed-period ARMs -- 3/1, 5/1, 7/1 and 10/1 -- are generally tied to the one-year Treasury securities index. ARMs with an initial fixed period beside of lifetime and adjustment caps usually also have a first adjustment cap, which limits the interest rate you will pay the first time your rate is adjusted. First adjustment caps vary with the type of FL loan program.
- Strengths: T he interest rate is lower than for a 30-year fixed (the lender is not locked in for as long so their risk is lower and they can charge less) but you still get the advantage of a fixed rate for a period of time.
- Weaknesses: These programs may not offer enough security for cautious borrowers, or may not be beneficial when rates are on the rise.
- Comments: Descriptions of each fixed-period ARM are included in the Adjustable Rate Mortgages section above.
2. Two-Step Mortgage
Two-Step mortgages have a fixed rate for a certain time, most often 5 or 7 years, and then the interest rate changes to a current market rate. After that adjustment the mortgage maintains a new fixed rate for the remaining 23 or 25 years.
- Strengths: This program offers a lower fixed interest rate for the first 5 or 7 years than is available for a conventional 30 year fixed rate program, while giving the security of a fixed rate program making it less risky than an adjustable rate program.
- Weaknesses: If the rates increase after the initial 5 or 7 year period, the rate increase could be fairly dramatic.
- Comments: This program is best for someone who wants the security of a fixed rate and plans to own their home for fewer than 7 years.
3. Convertible ARMs
Some ARMs come with the option to convert them to a fixed-rate mortgage at designated times (usually during the first five years on the adjustment date), if you see interest rates starting to rise. The new rate is established at the current market rate for fixed-rate mortgages.
- Strengths: This program provides some security for the ARM if rates start to rise. The conversion is typically done for a nominal fee and requires almost no paperwork.
- Weaknesses: The conversion interest rate is typically a little higher than the market rate at that time.
- Comments: This may be the right program for someone who wants an adjustable rate mortgage for the life of the FL loan, but with a safety net.
The other kind of convertible mortgage is a fixed rate loan with a rate reduction option. If rates had dropped since the time of closing it allows you, under some prescribed conditions and a small conversion fee, to adjust your mortgage to the going market rate. Generally the interest rate or discount points may be a little higher than for a convertible loan.
4. Graduated Payment Mortgages (GPMs)
Graduated payment mortgages have payments that start low and gradually increase at predetermined times.
- Strengths: A lower initial payment allows you to qualify for a larger loan amount.
Weaknesses: The monthly payments will eventually be higher in order to catch up from the lower payments. In fact, your loan will be negatively amortizing during the early years of the loan, then you pay off the principal at an accelerated pace through the later years.
- Comments: Lenders offer different GPM payment plans, which vary in the rate of payment increases and the number of years over which the payments will increase. The greater the rate of increase or the longer the period of increases, the lower the mortgage payments in the early years.
5. Buydown Mortgage
A temporary buydown is the type of loan with an initially discounted interest rate, which gradually increases to an agreed-upon fixed rate usually within one to three years.
- Strengths: An initially discounted rate allows you to qualify for more house with the same income and gives you the advantage of lower initial monthly payments for the first years of the loan when extra money may be needed for furnishings or home improvements. A buydown may be used to qualify a borrower who would otherwise not qualify. This is because a buydown results in lower payments, which are easier to qualify for.
- Weaknesses: To reduce your monthly payments during the first few years of a mortgage you make an initial lump sum payment to the lender.
- Comments: If you do not have the cash to pay for the buydown, the lender can pay this fee if you agree on a little higher interest rate. A very popular buydown is the 2-1 buydown. 3-2-1 and 1-0 buydowns are also available, though less common. Compressed Buydown, works the same way, but with the interest rate changing every six months instead of on an annual basis. The lower rate may apply for the full duration of the FL loan or for just the first few years.
Government Loans
• FHA Loans
The Federal Housing Administration (FHA), which is part of the U.S. Dept. of Housing and Urban Development (HUD), offers various mortgage loan programs. FHA loans have lower down payment requirements and are easier to qualify for than conventional loans.
• VA Loans
VA loans are guaranteed by the U.S. Dept. of Veterans Affairs. The guaranty allows veterans and service persons to obtain home loans with favorable loan terms, usually without a down payment. In addition, it is easier to qualify for a VA loan than a conventional loan. Lenders generally limit the loan amount for VA loans. The U.S. Department of Veterans Affairs does not make loans, it guarantees loans made by lenders. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a VA loan. VA-guaranteed loans are obtained by making application to private lending institutions.
• RHS Loan Programs
The Rural Housing Service (RHS) of the U.S. Dept. of Agriculture guarantees loans for rural residents with minimal closing costs and no down payment.
• State and Local Housing Programs
Many states, counties and cities provide low to moderate housing finance programs, down payment assistance programs, or programs tailored specifically for a first time buyer. These programs typically have easier qualification guidelines and are often designed with lower upfront fees. Also, there are often FL loan assistance programs offered at the local or state level such as MCC (Mortgage Credit Certificate), which allows you a tax credit for part of your interest payment. Most of these programs are fixed rate mortgages and have interest rates lower than the current market.
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