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Types of mortgages

Fixed rate mortgages

A fixed rate mortgage is your basic vanilla loan. The money you pay back in interest each month is agreed upon in advance and does not change for the life of the loan. The interest rate is influenced by the ten year Treasury bonds. As mentioned above, the term is for fifteen or thirty years.

ARM

An adjustable rate mortgage is just that, adjustable; reflecting short term interest rates in general. Your first year the rate is most often fixed and tempting, as it is usually a couple of points below the market percentage with a cap on how high it can go as well. So if you have an ARM rate of 3 percent with a six point cap, your interest rate can go as high as 9 percent. Within each year, the rate has limits or margin as well, normally a rise of up to two percentage points. Make sure you do the math for the top numbers in your situation and get any and all rate information in writing.

Hybrid mortgages

This is a combination of fixed and ARM. This type of mortgage is generally fixed for odd years up to ten and then converts over to an ARM. If you feel more comfortable with a concrete grasp of your future financial picture, this is not the loan for you, as interest rates in ten years are anyone's guess.

A balloon loan is a type of hybrid, where you borrow money for a short amount of time, say five years, but the payments are for a 30 year amortization. At the end of five years, you will need to pay back the principal that remains. The enticement is the lower interest. Change your mind however and you could be stuck with taking out another mortgage with all the attending time, fees and new interest rate to cover that final payment. This loan is better for those who intend to live in their new home for a short amount of time but want the fixed rate security.

COFI or "cost of funds index" is an ARM that gets adjusted every month with no total or incremental caps. However, the rate is based on a generally very slow moving index, i.e., the rate the banks pay depositors. You can pay more than assessed each month as your finances dictate.

FHA mortgages

The Federal Housing Administration is a federal agency that helps low and moderate wage earners purchase homes. Although the FHA doesn't actually lend the money, it

  • insures the loans,
  • allows the buyer to take out loans with a minimum down payment of about 3 percent of the home's value
  • offers an interest rate about 1 percent below market rates.

    Since the FHA is paying for the mortgage insurance, a homeowner with an FHA loan will have to pay a charge for that insurance. Also, the home must be inspected by an FHA appraiser before any loan can be granted.

    Veteran Administration Loans

    If you are a certifiably eligible veteran you may be able to get a VA loan with a lower interest rate and no or low down payment.

    Wanna live in the boonies?

    The address you are considering may qualify as a rural area or depressed region. There are federal loans you may qualify for that are similar to the FHA options but allow your income level to exceed the FHA levels. Check it out.

    Interest only mortgages

    The Mother of All Loans

    Interest only mortgages (IO) are something of a rage these days as people use the real estate market as an investment. You will pay only the interest on the loan for the first couple of years but beware the unpredictable real estate market. Come selling time, the house may not be worth as much as you paid for it and you will have to come up with the extra money to pay the loan back...money that you may not have.

    Be very careful considering interest only mortgages as there are a number of variables that need to be in-sync for this to be a good deal for you.

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