Types of Mortgages
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The many different types of Mortgages explained
- Fixed Rate Mortgage – A mortgage in which the interest rate does not change during the entire term of the loan.
- Adjustable Rate Mortgage – A mortgage with an interest rate that may change, usually in response to changes in the Treasury Bill rate or the prime rate . The purpose of the interest rate adjustment is primarily to bring the interest rate on the mortgage in line with market rates. The mortgage holder is protected by a maximum interest rate (called a ceiling ), which might be reset annually. ARMs usually start with better rates than fixed rate mortgages, in order to compensate the borrower for the additional risk that future interest rate fluctuations will create.
- Jumbo Mortgage – The current loan limit for a conforming loan is $275,000. Loan amounts of $275,001 and above are considered non-conforming or jumbo mortgages and are usually subject to higher pricing.
- Two-Step Mortgage – These are 30 year mortgages that come in two different types: convertible and nonconvertible. These loans are also known as 5/25s and 7/23s. The 5/25s has a fixed interest rate for the first five years and then coverts to either a 25 year fixed or a 1 year adjustable. The 7/23 has a fixed interest rate for the first seven years and then converts to a 23 year fixed or a 1 year adjustable. The initial interest rate is lower than a 30-year fixed, however, this is higher than a 1-year adjustable. Also, there is less risk involved than with an ARM initially as the adjustment interval is longer.
- Biweekly Mortgage – Mortgage loan payments that requires a payment twice monthly, yielding thirteen payments per year instead of twelve. This significantly reduces the time a principal is paid off.
- Balloon Mortgage – A mortgage that has level monthly payments of principal and interest that do not fully amortize the loan. The balance is due in a lump sum payment at a specified date, usually at the end of the term.
- Assumable Mortgage – A mortgage that can be taken over ("assumed") by the buyer when a home is sold.
- Sub prime Mortgage – A mortgage granted to a borrower considered subprime, that is, a person with a less-than-perfect credit report. Subprime borrowers have either missed payments on debt or have been late with payments. Lenders charge a higher interest rate to compensate for the potential losses from customers who may run into trouble or default.
- Construction Mortgage – Mortgages for people who want to build new homes. These are two part mortgages with high initial interest rates
