Home Loan Types |
Loan DescriptionsBelow, you will see a brief description of the many types of mortgage loans. Some of them are not used as much as others. I am available to help you with any questions that you might have. Just call me at: 717-975-9446, fax: 717-975-2309, or email me at info@dcdlaw.net. Conforming LoanA loan in which the amount borrowed is less than or equal to $322,700 (this number could be different depending on the bank) Jumbo LoanA loan in which the amount borrowed is greater than $322,700 (this number could be different depending on the bank) 30 Year Fixed Rate LoanThis type of loan has 360 monthly payments that remain the same for the entire 30 year period after which time the loan is paid in full. The monthly payment is based on an interest rate which does not change over the term of the loan (hence the term "fixed rate"). 20 Year Fixed Rate LoanThis type of loan is the same as the 30 year fixed rate loan except the life of the loan is 240 months as opposed to 360 months. Since the loan is being paid slightly faster than the 30 year fixed rate loan, monthly payments for this type loan are higher than the 30 year fixed rate loan. 15 Year Fixed Rate Loan
This type of loan is the same as the 30 year fixed rate loan
except the life of the loan is 180 months as opposed to 360
months. Since the loan is being paid faster than either the
30 year fixed rate loan or the 20 year fixed rate loan, monthly
payments for this type loan are higher than the other two
loans. Interest Only Loan
A mortgage is “interest only” if the monthly mortgage
payment does not include any repayment of principal for some
period. The payment consists of interest only. During that
period, the loan balance remains unchanged.For example, if
a 30-year fixed-rate loan of $100,000 at 8.5% is interest
only, the payment is .085/12 times $100,000, or $708.34. Otherwise,
the payment would be $768.92. This is the “fully amortizing
payment” – the payment that, if maintained over
the term of the loan, will pay it off completely. The interest
only loan thus reduces the monthly payment by 7.9%. A loan
that is interest-only for the full term would not amortize.
The loan balance would be the same at term as it was at the
outset. Back in the twenties, loans of this type were the
norm. Borrowers typically refinanced at term, which worked
fine so long as the house didn’t lose value and the
borrower didn’t lose his job. But the depression of
the thirties caused a large proportion of these loans to go
into foreclosure. Lenders stopped writing them and have never
brought them back. They want loans that eventually amortize.
Hence, the interest only loans of today are interest only
for a specified period, such as 5 years. At the end of that
period, the payment is raised to the fully amortizing level.
In such case, the new payment will be larger than it would
have been if it had been fully amortizing at the outset. Suppose,
for example, the interest only period on the loan described
above is 5 years. Then the payment starting in month 61 would
be $805.23. To reduce the payment by $60.58 for the first
5 years, the borrower would pay an additional $36.31 for the
next 25. The longer the interest only period, the larger the
new payment will be when the interest only period ends. If
the same loan is interest only for 10 years, for example,
the fully amortizing payment beginning in month 121 is $867.83.
To reduce the payment by $60.58 for the first 10 years, the
borrower would pay an additional $98.91 for the next 20. Interest
only mortgages are for borrowers who want a lower initial
payment, and have some confidence that they will be able to
deal with a payment increase in the future. 5 Year Balloon Loan
This type of loan has fixed monthly payments for the term
of the loan (five years) that are based on a 30 year repayment
schedule. At the end of the five year term, the outstanding
principal balance of the loan is due plus any unpaid interest.
7 Year Balloon LoanThis type of loan is similar to the 5 Year Balloon loan except for the fact that the term of the loan is 7 years as opposed to 5 years and the refinance option at the end of the term is for an additional 23 years as opposed to 25 years. As with the 5 Year Balloon loan, the index is typically the fixed interest rate offered at that time by the Federal National Mortgage Association (60 day mandatory yield rate) and is calculated by adding a specified amount to the index (typically .625% - 1.25%). Also, as with the 5 Year Balloon, loan, the borrower must meet specified conditions to be able to take advantage of the loan extension option and the interest rate must not have risen by more than 5.00% over the initial rate. Pre-approval LoanSome lenders offer loan programs that provide borrowers the opportunity to obtain an approval for their loan before they select a property to purchase. Generally, such pre-approvals are subject only to a satisfactory appraisal of the property ultimately selected by the borrower. A pre-approval should not be confused with a pre-qualification, which is an unverified analysis of a borrower's ability to qualify for a loan and is subject to verification of a borrower's income, a borrower's assets and a satisfactory appraisal of the property selected for purchase. First-Time Home buyer LoanA loan is considered a 1st time home buyer loan when it has one or more features that are available only to 1st time home buyers. For example, a lender may reduce its interest rate (typically by one eighth to one quarter of one percent), reduce or eliminate its closing costs and, if an adjustable rate mortgage, reduce its margin (typically by one quarter of one percent). Such a loan may also have less stringent loan qualification guidelines. 5/25 Two Step MortgageThis type of loan has monthly payments that are based on a 30 year repayment schedule and the interest rate remains fixed for the first 60 months (five years). After that time, the interest rate (and, therefore, the monthly payments) may change once for the remaining 25 years of the loan. The new interest rate is based upon fluctuations in an index (typically the fixed interest rate offered at that time by the Federal National Mortgage Association (60 day mandatory yield rate) and is calculated by adding a specified amount to the index. The amount that is added to the index is called the "margin" (typically .625% - 1.25%). For example, if the index equals 5.0% at the time of adjustment, and the margin equals 1.0%, the new interest rate would be 6.0%. However, this type of loan program usually has limits on how much the interest rate can increase or decrease at the time of the interest rate adjustment. Typically, the interest rate cannot increase more than 6% from the initial interest rate nor decrease more than 1.5% from the initial rate. 7/23 Two Step MortgageThis type of loan is similar to the 5/25 Two Step Mortgage except for the fact that the monthly payments remain fixed for the first 84 months (seven years) as opposed to five years and after that time the interest rate may change once for the remaining 23 years of the loan. As with a 5/25 Two Step Mortgage, the index is typically the fixed interest rate offered at that time by the Federal National Mortgage Association (60 day mandatory yield rate), the margin is typically .625% -1.25% and the interest rate cannot increase more than 6% from the initial interest rate nor decrease more than 1.5% from the initial rate. 3-2-1- Buy down Loan
This type of loan program is based on an interest rate (actual
rate) that does not change over the term of the loan and has
fixed monthly payments that are based on a 30 year repayment
schedule. However, the monthly payments that are made during
the first 36 months (three years) are calculated based on
an interest rate that is less than the actual rate. The first
12 monthly payments of the loan are calculated based on an
interest rate that is 3% less than the actual rate. For the
second year of the loan, payments 13 through 24 are based
on an interest rate that is 2% less than the actual rate of
the loan. For the third year of the loan, payments 25 through
36 are based on an interest rate that is 1% less than the
actual rate. After the third year, the monthly payments to
be made over the remaining 27 years of the loan are based
on the actual rate. 2-1 Buy down LoanThis type of loan is similar to a 3-2-1 Buy down loan, however, the buy down feature of the loan occurs during the first two years of the loan as opposed to the first three years. Accordingly, the first 12 monthly payments of the loan are calculated based on an interest rate that is 2% less than the actual rate and for the second year of the loan, payments 13 through 24 are calculated based on an interest rate that is 1% less than the actual interest rate. 1-0 Buy down LoanThis type of loan is similar to a 3-2-1 Buy down loan and a 2-1 Buy down loan however, the buy down feature of the loan occurs only during the first year of the loan as opposed to the first two or three years. Accordingly, the first 12 monthly payments of the loan are calculated based on an interest rate that is 1% less than the actual rate. Blended LoansSince fixed rate conforming loans (see definition above) generally have lower interest rates than fixed rate jumbo loans , some lenders offer borrowers seeking to borrow more than the conforming loan amount, a loan that allows the borrower to take advantage of the lower fixed interest rate of a conforming loan on a portion of their loan that does not exceed the conforming loan limit. This feature is then blended together with a variable interest rate feature on that portion of the loan amount that exceeds the conforming loan limit. For example, if the conforming loan limit is $322,700, a consumer looking for a fixed rate loan of more than $322,700 can obtain a conforming fixed interest rate on the first $322,700 of their loan provided they are willing to have a variable interest rate on that portion of their loan that exceeds $322,700. The variable interest rate portion is often similar to a home equity loan which is typically tied to the interest rate known as the "prime rate". B/C Credit LoanThese types of loans are available to borrowers who have or have had credit problems such as being late on or defaulting on the repayment of loans or credit cards. Although such loans are available as fixed rate or adjustable rate mortgage loans, the interest rate and/or costs associated with such loans are generally higher than loans available to borrowers who do not have a history of credit issues to reflect the fact that the risk associated with such loans is generally higher. Borrowers who do not have a history of credit issues are said to have "A" credit. Those with a history of credit issues are said to have "B" credit or "C" credit depending on the severity of the credit issues. Assumable LoanThis type of loan does not have to be paid off by a borrower when the borrower sells his/her home. Instead, the new buyer of the home may assume the obligation of the initial buyer to repay the loan in accordance with the terms of the loan. Generally, most loans are not assumable and some that are, may be subject to the lender's approval of the new borrower and/or the lender's ability to modify the terms of the loan. Second Home LoanThis type of loan is used to purchase or refinance a property other than a borrower's principal residence. In most instances, such a property is a borrower's vacation home (or "second home"). Provided that the property is not strictly an investment property, the interest rate and costs charged on such loans will generally be the same as those available on loans used to purchase or refinance a borrower's principal residence. No Income/No Asset Verification LoaThis type of loan is similar to a No Income Verification Loan and a No Asset Verification Loan except it is used by borrowers who do not wish to or are unable to verify their income and their assets. Once again, the interest rate and/or costs for such loans may be slightly higher than normal to reflect the higher degree of risk involved in loaning to borrowers without verifying their income or assets. Such risk is often offset, to some degree, by borrowers who have a significant history of paying loans of a similar type as the one being sought or who are borrowing only a small percentage of a property's value.Government LoanThis type of loan is guaranteed by a federal agency such as the Veterans Administration or the Federal Housing Administration or by a State agency such as a State housing authority. As a result, such loans are typically offered at reduced interest rates and have less stringent loan qualification guidelines. Such loans, however, are generally targeted to a specific group of people and contain income, purchase price or other eligibility requirements. Construction LoanThis type of loan is typically used to finance the construction of a home. It may or may not also include the purchase of the land upon which the home is to be built. Unlike a typical mortgage loan where the entire amount of the loan is disbursed to the borrower at the time the loan transaction is consummated, a construction loan typically involves a series of disbursements which are linked to a construction schedule. Some construction loans have fixed interest rates, others have variable interest rates. In addition, some construction loans automatically convert to a regular mortgage (referred to as "permanent" financing) once construction has been completed, while others require another loan transaction to take place so the borrower can payoff the construction loan and obtain permanent financing. Relocation LoanThis type of loan is offered by lenders to borrowers who are relocating their principal residence to the lender's area. Although such loans have most or all of the features associated with typical mortgage loans used to purchase a borrower's principal residence, relocation loans often have flexible loan qualification guidelines to accommodate situations that arise during a borrower's relocation to another area. For example, even though a borrower's spouse has not obtained a job in the area they are moving to, the lender may take all or a portion of the spouse's former employment income into consideration based on the anticipation of future employment. Bridge LoanThis type of loan is offered by lenders to borrowers who plan to use money from the sale of their current property to purchase their new property but are moving into the new property before the sale of their current property takes place. In such instances, a bridge loan is obtained, (based on and secured by the borrower's equity in their current property), to "bridge" the time between when the borrower buys their new property and the time when the borrower sells their current property At the time of the sale of the current property, the proceeds from such sale are used to pay off the bridge loan. Typically, bridge loans are for a short period of time (e.g. 3 - 6 months) and feature adjustable interest rates tied to an index such as the prime interest rate. Convertible LoanThis type of loan refers to an adjustable rate mortgage that contains a feature which allows a borrower to convert their loan from an adjustable rate mortgage to a fixed rate mortgage. Such loans generally contain a time period during which the borrower may exercise his/her option to convert (typically between the 13th and 60th month of the loan). The new fixed interest rate that the borrower converts to is based upon fluctuations in an index (typically the fixed interest rate offered at that time by the Federal National Mortgage Association (60 day mandatory yield rate) and is calculated by adding a specified amount to the index (typically .625% - 1.25%). For example, if the index equals 7.0% at the time of conversion and the margin is 1.0%, the new interest rate would be 8.0%. Some lenders charge borrowers a fee to exercise their conversion option, however, such fees generally do not exceed $250. Float down LoanThis type of loan refers to a loan that enables a borrower to "lock in" an interest rate (generally at the time of submitting a loan application) and obtain a better interest rate in the event that rates decrease between the time of submitting the application and the time the loan closing occurs. The initial interest rate basically "floats down" to the new rate. In many instances, the "float down" does not occur unless the decrease in the interest rate equals or exceeds .375% (3/8 of one percent). Land LoanWhile the typical mortgage loan involves both a structure and the land upon which the structure is built, this type of loan involves only land on which a structure has yet to be built. 10/3 Adjustable Rate Mortgage (ARM)This type of loan is similar to the 7/3 ARM except for the fact that the interest rate remains fixed for the first 120 months (ten years) as opposed to the first 84 months. After that time, the interest rate may change every 36 months. As with a 7/3 ARM, the index is typically the Three Year Treasury Security index, the margin is typically 2.50% - 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%. 10/1 Adjustable Rate Mortgage (ARM)This type of loan is similar to the 3/1 ARM except for the fact that the interest rate remains fixed for the first 120 months (ten years) as opposed to the first 36 months. After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). As with a 3/1 ARM, 5/1 ARM and 7/1 ARM, the index is typically the One Year Treasury Security index, the margin is typically 2.50% - 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%. No Income Verification LoanThese types of loans are available to borrowers who, for one reason or another, do not wish to or are unable to verify their annual income. An example of such borrowers includes those who obtain revenue from sources they do not wish to divulge or those that receive all or a portion of their income in cash. While available from some lenders as fixed or adjustable rate loans, the interest rate and/or costs may be slightly higher than normal to reflect the higher degree of risk involved in loaning to borrowers whose incomes have not been verified. Such risk is often offset to some degree by borrowers who have significant verifiable assets or who are borrowing only a small percentage of a property's value. Extended Lock LoanThis type of loan refers to a loan that enables a borrower to "lock in" an interest rate (generally at the time of submitting a loan application) for an extended period of time. Since most loan programs enable borrowers to lock for 45-60 days, a loan program that allows for longer periods of time such as 90, 120, or 180 days is considered an extended lock loans.6 Month Adjustable Rate Mortgage (ARM)This type of loan has monthly payments that are based on a 30 year repayment schedule but the interest rate (and, therefore, the monthly payments) may change every 6 months (this is referred to as the "adjustment period"). The new rate is based upon fluctuations in an index (typically the One Year Treasury Security) and is calculated by adding a specified amount to the index. The amount that is added to the index is called the "margin" (typically 2.50% - 3.00%). For example, if the index equals 5.0% at the time of adjustment and the margin equals 2.75%, the new interest rate would be 7.75%. However, this type of loan program usually has limits on how much the interest rate can change (either up or down) at each adjustment date, compared with the interest rate being charged before the new adjustment is made. Typically, this limit is 1% and is referred to as an "adjustment cap". There is also a limit as to how much the interest rate can change (either up or down) from the initial interest rate over the entire life of the loan (typically 6%) and this is referred to as a "lifetime cap". The monthly payment changes, as needed, at each adjustment period, to reflect the adjusted rate. 1 Year Adjustable Rate Mortgage (ARM)This type of loan is similar to the 6 month ARM except for the fact that the adjustment period is every 12 months (one year) as opposed to every 6 months. In addition, the adjustment cap on a 1 year ARM is typically 2% as opposed to 1%. The lifetime cap is typically 6%. The index is typically the One Year Treasury Security index and the margin is typically 2.50% - 3.00%. 2 Year Adjustable Rate Mortgage (ARM)This type of loan is also similar to the 6 month ARM except for the fact that the adjustment period is every 24 months (two years) as opposed to every 6 months. As with a 1 year ARM, the index is typically the One Year Treasury Security index and the margin is typically 2.50% - 3.00%. Also, the adjustment cap is typically 6%. 3 Year Adjustable Rate Mortgage (ARM)This type of loan (also referred to as a "3/3 ARM") is similar to the 6 month ARM except for the fact that the adjustment period is every 36 months (three years) as opposed to every 6 months. The index is typically the Three Year Treasury Security index. As with a 1 or 2 year ARM, the margin is typically 2.50% - 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%. 5 Year Adjustable Rate Mortgage (ARM)This type of loan (also referred to as a "5/5 ARM") is similar to the 6 month ARM except for the fact that the adjustment period is every 60 months (five years) as opposed to every 6 months. The index is typically the Five Year Treasury Security index. As with a 1 or 2 year ARM, the margin is typically 2.50% - 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%. 3/1 Adjustable Rate Mortgage (ARM)This type of loan has monthly payments that are based on a 30 year repayment schedule and the interest rate remains fixed for the first 36 months (three years). After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). This is referred to as the "adjustment period". The new rate is based upon fluctuations in an index (typically the One Year Treasury Security) and is calculated by adding a specified amount to the index. The amount that is added to the index is called the "margin" (typically 2.50% - 3.00%). For example, if the index equals 5.0% at the time of adjustment and the margin equals 2.75%, the new interest rate would be 7.75%. However, this type of loan program usually has limits on how much the interest rate can change (either up or down) at each adjustment date, compared with the interest rate being charged before the new adjustment is made. Typically, this limit is 2% and is referred to as an "adjustment cap". There is also a limit as to how much the interest rate can change (either up or down) from the initial interest rate over the entire life of the loan (typically 6%) and this is referred to as a "lifetime cap". The monthly payment changes, as needed, at each adjustment period, to reflect the adjusted rate. 5/1 Adjustable Rate Mortgage (ARM) |
