It is Important That You Understand All of the Types of Mortgages to Choose Between Today.
It appears that everything in the world is getting complicated today, and mortgage loans are not an exception to the rule. If you are shopping for a mortgage today, don’t expect that the only one you will be offered is the standard fixed rate, thirty year mortgage that grandpas had in the old days.
Times have changed considerably since grandma and grandpa’s day, and we exist with a lot more change. We change jobs more often, and so we have to change homes and we like to move to bigger and bigger homes as we earn more and more income.
Another reason that mortgage loans are more complex is that the other financial markets are more complicated, and new instruments have to fit the need.
Following is a short list of the new kindstypes of home loans that today’s borrowers will be faced with.
It’s a lot different than the old days.
A conventional loan is a home loan that has no government guarantees whatsoever.
A Government loan is the one that has a guarantee from some government or semi government entity.
Conforming loan: Two major quasi-governmental agencies (Fannie Mae and Freddie Mac) guarantee certain loans that meet with their own criteria. These are often called “A” paper conforming mortgages.
B, C loan: These are loans that will not be guaranteed by Fannie Mae and Freddie Mac because they do not conform. These types of mortgages are usually the ones given to borrowers with poor credit ratings, or who have even experienced bankruptcy. often, they are used as temporary mortgages until a conforming mortgage can be put in place.
Jumbo loan: A loan that is above the maximum loan amount set by Fannie Mae and Freddie Mac. A jumbo mortgage will carry a higher interest rate since the market for these loans is somewhat illiquid.
Fixed rate loans: This is the traditional loan such as grandpa would have known about-fixed term, fixed rate. The rate is fixed at the beginning of the loan, and therefore the mortgage payments remain the same throughout the term of the loan. Most of these mortgages have a term of about 25 years, but they exist from 15 to 40 year maturities. If you have a mortgage with a shorter maturity, you will normally have a loan with a lower rate and the reason for this is that banks can’t fix low rates too far in advance.
Balloon Loan: A loan with a fixed rate and fixed monthly payment, but shorter maturity than a fixed rate mortgage. These loans have lower interest rates, but since they have to be fully paid at maturity, there is a chance that interest rates will be higher when they are paid down.
Adjustable Rate Loan: This loan solved the problemof banks having to take uncomfortable risks on the direction of interest rates, since the rate is changed periodically over the life of the mortgage, based upon a pre-determined index, such as Treasury Bills, Certificates of Deposit, Cost of Funds Index, the Prime Rate and others.
Even among this assortment of loans, there are further variations, so lenders and consumers are practically tailor making each loan today. This makes the mortgage market even more complicated and filled with problems for the average consumer, who should consult with a mortgage consultant before he makes a decision.
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