Types Of Mortgage Loans
There are many different mortgage programs from which to choose. Selecting one depends on your financial situation, your plans for the property that you are purchasing, the length of time that you intend owning it, and much more. The best way to go about choosing the best loan for your circumstances is to consult a reputable and experienced mortgage broker.
Fixed Rate Loan
You will most likely be familiar with a 30 year fixed rate mortgage loan. Variations are 20, 15 and even 10-year terms. With these loans, the interest rate never fluctuates, and so your payment commitment is always the same, except for increases in taxes and insurance.
One unpopular characteristic of a fixed rate loan is the fact that during the early repayment years, most of the payment money goes towards paying interest and only a small portion towards principal reduction.
Accelerated payment options to a fixed rate loan
A popular way to reduce the term and interest cost of a fixed rate loan is to make 26 bi-weekly payments, instead of 12 monthly payments every year.
Adjustable Rate Mortgage
Borrowers who are expecting an increase in earnings in the foreseeable near future are attracted to adjustable interest rate mortgage loans. Adjustable rate mortgages (ARMs) allow borrowers to buy homes that they can’t afford the payments for now, but believe that they will be able to in the future.
The reason for this is because a lower interest rate is charged by a lender during an agreed initial period. After that it increases at an agreed rate and time and also fluctuates depending on market-driven financial indexes, such the 1-Year Treasury Security or LIBOR (London Interbank Offered Rate).
Short term and balloon loans
Fixed rate loans with short terms are referred to as balloon loans. These loans are usually required to be repaid or refinanced after 5 or 7 years, and in some instances can be converted into standard fixed rate, long term loan.
Graduated Payment Loans.
This type of loan is almost the same as an Adjustable Rate Mortgage but without the uncertainty of the financial indexes driven fluctuations. Instead, the lender issues a fixed schedule of graduated payment requirements which become fixed after a predetermined period. A Graduated Payment Loan, or GPM as it is more popularly known, is easier to qualify for but is ultimately more expensive than a Fixed Rate Loan.
Construction to Permanent loans
A construction loan is typically a short-term loan which can be refinanced/replaced by a permanent loan once the home is built. In the past, this two-step process has traditionally required a borrower to qualify for each loan independently as well as two separate closings.
However, in recent years a more popular loan called the “one time close” or “rollover” loan has appeared on the market. This product requires a borrower only to qualify once and for there to be only one closing, and one set of closing costs to pay.
Renovation loans provide an opportunity for home buyers to include certain additional features or remodeling costs into their home purchase loans. This is made possible by the lender appraising the home at the after improvement value instead of the traditional as-is value. Borrowers who take this opportunity are able to have the seller paid for the home at closing and then the improvement portion of their loan held in escrow to pay the contractors later, after they have completed the improvements.
Renovation loans are also usually less expensive, require a lower down payment, are easier to qualify for, and are even available to investors.
A renovation loan is absolutely the most perfect loan for buyers who want to do a green makeover of the home before occupation. Existing homeowners can also take advantage of this opportunity by doing a renovation loan refinance. This allows them to have their home appraised at the after makeover value and then include the cost of the work in the new loan.
Hopefully, the above information has been helpful to you. If you have not already done so, please visit my can you afford mortgage financing page to get you going. You will then have an idea of whether you can afford mortgage financing, and if so, take the next step, which will be to start talking to a mortgage loan officer.
Our services are always FREE to Buyers, and we contribute $500 towards closing costs if you buy through us, as well as $250 toward our Switch to Green, Switch it Forward Fund, to help fight poverty and climate change.
Let us show you how we can be Your Green Dream Team to help you to Live in a High Performance Green Home, that will Save You Money and help you to Pay Your Mortgage Off Years Earlier, while at the same time, live in a home that is Healthier, More Comfortable, Safer and Kinder To The Earth.
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Marius J Smook – Licensed Real Estate Eco-Broker, LEED AP for HOMES, Home Energy Rater.