UNDERSTANDING

EDUCATION IS THE KEY TO CHOOSING
THE MORTGAGE OPTION THAT'S RIGHT FOR YOU

Whether you're buying your first home or your fifth, understanding your financing options can seem like a daunting task. Your mortgage professional is an invaluable resource and will have all the details, but here are a few basics to get you started.

FIXED RATE MORTGAGE

The interest rate remains the same for the life of the loan. This type of loan is generally popular because it's very predictable and easy to budget around. If interest rates drop, borrowers can consider refinancing at the lower rate. Interest rates for fixed rate mortgages tend to be higher than adjustable rate loans, so the monthly payments will also be higher.

ADJUSTABLE RATE MORTGAGE

The interest rate changes to match current interest rates. It can go up or down. These mortgages usually have a lower initial interest rate and then a set adjustment schedule, which can range anywhere from 1, 3, 5, 7 or even ten years. This type of loan is popular with those who plan to only be in the home a short period, or who are able to absorb budget changes over the long term.

SECOND MORTGAGE

This involves taking out a second lien on the property. It is generally a fixed rate loan. This option is often incorporated with another (first) mortgage to avoid payment PMI (Private Mortgage Insurance).

HOME EQUITY LINE OF CREDIT

This is another type of second mortgage. Instead of receiving a lump sum, borrowers receive the funds as they need them, over a period of time. Home equity lines are generally adjustable rate mortgages. Some borrowers use them to make home improvements, while others use them to pay for college tuition or other large expenses.

JUMBO MORTGAGE

Mortgages which exceed loan limit guidelines set by Fannie Mae and Freddie Mac (over $360,000 in most states) are considered Jumbos. They have higher interest rates than conforming loans. While this allows you to purchase a bigger and more expensive home, it also puts the lender at higher risk - thus the higher interest rate.

GRADUATED PAYMENT MORTGAGE

Payments start low but then increase over time. This may help buyers who can't qualify for a traditional mortgage. Initially you're not paying interest on the loan, which is known as negative amortization. These loans tend to have varying rates of increase over varying amounts of time. The borrower takes on the risk of being able to pay the increase in the mortgage each time it occurs.

BALLOON MORTGAGE

This type of mortgage offers lower interest rates and lower payments for a set period of time, generally 3 to 10 years. At the end of that period, the balance of the loan is due. Sometimes the mortgage can be converted into a fixed rate or adjustable rate loan at that time. This may be an appropriate loan option for you if you plan to sell your home before the end date on the loan.

TWO-STEP MORTGAGES

Combines fixed and adjustable rate mortgages. Sometimes they're called 2/28, 5/25 or 7/23. They have one fixed rate and payment for a certain period, then an adjustment happens and borrowers face another fixed rate and payment for the rest of the term. If you have less than perfect credit, it allows you to redeem yourself in a matter of a few years and then get a lower rate.

BIWEEKLY MORTGAGE

Borrowers make payments on a fixed rate mortgage every other week instead of on a monthly basis. Basically this means you end up paying your mortgage off in less than 23 years rather than 30 because it results in 13 months worth of payments each year. The 13th payment is applied solely towards principal.

SIMPLE INTEREST MORTGAGE

The interest is calculated on a daily basis as opposed to a monthly basis like other mortgages. If you have an interest rate of 5.5% for instance, instead of being divided by 12 to figure the amount, it is divided by 365. With this mortgage you must make the payment before the due date each month in order to maximize the lower interest rate.

SUBPRIME MORTGAGE

If you have poor credit, this may be the best way for you to qualify for a mortgage. You'll pay higher interest rates and have less attractive terms than someone with good credit, but it will at least get you in the door.

CONSTRUCTION MORTGAGES

If you're looking to build a home, you would take out this type of loan, typically at higher interest rates, to fund the construction. Once it's done, and you close on the home, the mortgage generally converts, to a conventional long-term loan.

SELLER FINANCED

In this case the home's seller provides the financing for the buyer. The buyer makes the payments to the seller instead of directly to the bank.

FIRST-TIME BUYER

This usually requires a lower down payment than a traditional mortgage would. Not every first time buyer qualifies - there are certain requirements for income and property values on the house that must be met. There are also penalties if you sell the home too soon.

If you have questions about the mortgages available to you, please don't hesitate to ask. I'd love to explain your options further.