Mortgage loans basically fall into one of two categories: government or conventional.Government loans are normally insured by the Federal Housing Administration (FHA) or the Veteran’s Administration . Some offer lower down payments and most offer favorable terms.
Conventional loans can be either conforming or non-conforming. Conforming loans follow the guidelines set forth by the Federal National Mortgage Administration (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These types of loans can be either fixed or adjustable. Each is tied into a specific rate, term and limit which can vary from lender to lender. Non-conforming loans, on the other hand, do not adhere to any strict guidelines.
How do fixed-rate mortgage work? Fixed-rate mortgages retain the same APR throughout the life of the loan. However, the property tax and homeowner’s insurance, if built into the cost of the loan, may change over time. The most popular type of fixed loan is a 30-year term.
For those who prefer a shorter timeframe, a 15-year fixed mortgage may be a better option. While the amount of time it takes to repay is shorter, you can usually secure a better interest rate (.25-.50% lower than a 30-year fixed). Besides a 15- and 30-year term, fixed loans are also available in 40 and 50 year terms.
How do adjustable rate mortgages work? Unlike fixed-rate mortgages, adjustable rate mortgage (ARMs) are based on shorter term securities that fluctuate upward or downward based on today’s leading indexes (e.g., Constant Maturity Treasury (CMT), London Interbank Offering Rate (LIBOR) or Treasury Bill. A margin is added on top of the index rate by the lender to calculate theinterest rate.
Because ARMs are adjustable, they go up and down at pre-set intervals during the duration of the loan. Some offer a low teaser rate to qualify potential buyers which accelerates to a higher rate thereafter. ARMs can adjust once a year, every month, or three to five years, and are typically amortized over a 30 year period. Some offer a lifetime cap which sets the maximum rate that can be charged during the life of the loan with some states having their own percentage limits.
Lower your payment with an Interest-only ARM loan Another variation of the ARM is the Interest-only adjustable rate mortgage. This loan makes it affordable for borrowers to qualify for a loan by giving them the option to pay only the interest (not the principal) for the first 3-10 years of the loan. Monthly payments are usually more affordable. Afterwards, the mortgage rate adjusts to a traditional ARM at the current indexed interest rate with new principal and interest payments calculated for the remaining term of the loan.
Example A 30-year ARM loan of $250,000 at 7.50% APR has interest-only payments for 5 years. The payment during this time would be $1,522 per month. After 5 years, the payment would increase to $1,816 per month.
Sub-prime loans Borrowers who have a low FICO® score will usually fall into the sub-prime mortgage category. As a result, they’ll qualify for a loan but at a much higher rate. Lenders may apply stiffer pre-payment penalty fees in the form of interest payments to dissuade borrowers from building up any equity in their home. Some lenders may require a “balloon” payment to pay off the remaining balance of the loan after a fixed period of time. This article i read from www.mortgages.nationalrelocation.com n i post to you all i hope it's uselfull for you..
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