| Adjustable-Rate
Mortgages |
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With adjustable-rate
mortgages (ARM's) the interest rate is linked to
current market rates and fluctuates with economic
changes. When interest rates go down, so do your
mortgage payments. When rates go up, your mortgage
payments increase accordingly. ARM interest rates
are usually set lower than those found in fixed-rate
mortgage, at least at the beginning of the term.
This means that a homebuyer opting for an ARM will
be able to qualify for a larger loan since they
are paying less interest. However, because ARM interest
rates fluctuate there is a level of uncertainty
and risk involved if economic conditions create
long-term interest rate increases. ARM interest
rates are normally fixed for the first six months
to a year, after which they are pegged to some major
economic index such as the T-bill rate.
For adjustable-rate mortgages there are two "caps"
on interest rate increases. The "period of
adjustment" cap determines how much the interest
rate is allowed to vary from one period to the next.
For example, if the agreed upon period is every
six months with a period of adjustment cap of 1%,
then the maximum interest rate increase over that
six-month period could not exceed 1%. The second
cap puts a ceiling on how high the interest rate
can increase over the life of the loan. For example,
the maximum increase might be negotiated to be 6%.
This figure should be taken into account as the
"worst-case scenario" when considering
this type of financing since the interest rate could
possibly rise by up to 6% from the initial rate.
If you are sure that you could afford these worst-case
rates then you might consider this type of mortgage
since you would benefit if the rates went down.
Another feature which can sometimes add a level
of comfort to this type of mortgage is a conversion
feature. Having a conversion clause in the mortgage
gives the homebuyer the option to lock in the interest
rate at certain times during the term of the mortgage.
There is usually a conversion charge associated
with this option. |
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2-Step Mortgages |
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A 2-step mortgage
is a combination of both fixed-rate mortgages and
adjustable-rate mortgages. Generally speaking, the
first 5-7 years of the mortgage are treated like
a fixed-rate mortgage. During the remainder of the
term, known as the second step, the interest rate
is allowed to fluctuate like an adjustable-rate
mortgage.
During the initial first step of a 2-Step mortgage
the interest rate is generally lower than for a
fixed rate mortgage but higher than for an adjustable
rate mortgage. The benefit of this type of mortgage
is that it initially offers the homebuyer a lower
interest rate than those found in fixed rate mortgages
while still retaining the stability of a fixed payment
and interest rate for the first few years of the
loan. The homebuyer still needs to keep in mind
that in the second step, or adjustable-rate portion
of the mortgage, the interest rate may move either
up or down, depending on the economy. As mentioned
in the above section on Adjustable Rate Mortgages,
a mortgage conversion feature can sometimes add
a cushion of security to this type of mortgage.
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Conforming & Non-conforming
Mortgages |
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| A conforming mortgage
refers to a mortgage that is drawn up within the
guidelines specified by the lending institutions
referred to as Fannie Mae and Freddie Mac. The most
common reason for a mortgage to be referred to as
non-conforming is because the total amount of the
mortgage exceeds the lending limits or total loan
amount allowed. This type of non-conforming loan
is often referred to as a Jumbo mortgage. |
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Baloon Mortgages |
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This type of mortgage
is usually amortized over the traditional 30-year
period, but the actual length of the loan, or the
term, is much shorter. At the end of the term, the
homeowner must renegotiate a new mortgage at the
new current interest rates. The amount still owning
at the end of a balloon mortgage term (that is the
original loan amount less the payments made against
the principle during the term) is then due in full.
The homeowner will then have to obtain a new mortgage
(either another balloon mortgage, or switch to a
fixed-rate or adjustable-rate mortgage) to replace
the expired one. The benefit of a balloon mortgage
is that the interest rate is noticeably lower than
that for traditional 30-year fixed-rate mortgages.
Please note that homebuyers need to understand that:
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Once a balloon
mortgage is due their next mortgage will be set
at the new current interest rates which could be
higher or lower than before.
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They may not have
a guaranteed renewal privilege and may have to go
elsewhere to obtain a new mortgage.
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They may have to
financially re-qualify for the next mortgage.
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Refinancing fees
may be charged |
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Federal Housing Administration
Mortgages (FHAM) |
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| These are mortgages
that are guaranteed against default by the Federal
government. Lenders are willing to give mortgages
to homebuyers with smaller down payments than under
conventional financing because the Federal government
guarantees the loan against default. The homebuyer
must pay an insurance premium for this privilege
and this cost is usually added to the mortgage.
In order to qualify for an FHAM the property in
question must meet certain requirements. The maximum
amount of loan allowed under this system varies
from region to region and is based on the average
price of housing in each area. You should contact
your REALTOR® or mortgage specialist for further
information. |
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Veterans Administration Loans
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| VA loans are restricted
to qualifying U.S. veterans for the purchase of
a home with no down payment and lowered closing
costs. |
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Fannie Mae & Freddie Mac
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| Both Fannie Mae
and Freddie Mac are independent, privately run companies
that operate under special congressional charters.
Their mandate is to ensure that mortgage funds are
made available to a broad spectrum of the American
public. They do this by buying mortgages from approved
lenders and then packaging those monies into securities
backed by Fannie Mae/Freddie Mac. Those securities
are then sold to investors in the secondary mortgage
market. Fannie Mae and Freddie Mac are independently
owned companies that compete with each other for
mortgage business. This competition ensures that
there is an ample supply of low cost mortgage money
available to the American homebuyer. |