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This type of mortgage is designed to help low and moderate income people become home owners. It requires low down payments and has flexible lending requirements.
If
borrower defaults, government steps in and pays guarantee. This makes it easier for lenders to write mortgages they would otherwise refuse.
Fixed Rate
Fixed rate mortgages have interest rates set for term of mortgage, which can be anywhere between 5 to 30 years.
Although they can be interest only or have a balloon, they usually are conventionally amortized mortgages.
At times like now, when rates are low, most homeowners want to lock in low fixed rates. They are popular when rates are falling, not so popular when they’re high or going up.
This type mortgage is a very good idea if you're planning to live in your house for a while.
Home Equity Line of Credit
A revolving credit line secured by your home. Because it is a mortgage, it carries a lower rate than other forms of credit and is tax deductible.
It differs from a second mortgage in that it is not for a fixed term or amount and can be kept in effect as long as you own your home.
This is used most frequently for debt consolidation and can be useful if you rip up your credit cards and use money you save on interest to invest.
Interest Only Mortgages
This is just what it says. You only pay interest, principal is never reduced.
This is grand daddy of all balloon mortgages and you taking a big risk that your house depreciates in value rather than other way around.
You could very well have to come up with extra cash at closing.
The payments are much lower than on a normally amortized mortgage and if you have discipline, it can be a useful financial planning tool.
Jumbo Mortgages
Mortgage loans over $322,700 (the limit is periodically raised). Otherwise, mortgage can be fixed or variable, balloon, etc.
Rates are usually a little higher than for smaller loans.
No Doc or Low Doc Mortgages
This refers to mortgage application, not to mortgage itself. Business owners, people living off investments, salesmen and others whose income is variable might use low or limited documentation mortgages.
Very wealthy borrowers or those who want substantial financial privacy will sometimes use no doc option.
In either case, in spite of their names some documentation is required. The lender will accept nothing less than excellent credit and even then you will pay more for privilege.
No Money Down Mortgages
These come in two flavors: FHA type loans that allow low or moderate income borrowers to buy a house with little or nothing down and 80-20 plans, where wealthier borrowers with little money saved up finance 100% of purchase price.
Under 80-20 plan a first and second mortgage are issued simultaneously. The borrower avoids having to buy mortgage insurance. The two loans are designed to cost less than an 80% loan plus insurance, otherwise they make no sense.
If borrower puts some money down, you will see mortgage referred to as 80-10-10 (the last digits will be percent of down payment) or some similar number.
It is mostly used by borrowers who haven’t saved enough for a down payment or by those who have money, but would rather use it for other purposes.
Refinancing
This technically means getting a new mortgage at different, hopefully better terms. A lot of people use it interchangeably with obtaining a second mortgage or line of credit; in other words tapping into equity of their house.
Second Mortgages
Secondary financing obtained by a borrower. They can be fixed in amount or take form of a Home Equity Line of Credit, which is simply a revolving credit line secured by a house.
Homeowners use these forms of financing to consolidate bills, do home renovations, put their kids through college, etc. They are tapping into equity they have in their house to use for other things.
This is not necessarily a great idea. You must take firm control of your finances when you start doing this or you risk either losing your house or having to raise cash to pay mortgages off when you sell.
If done properly, you can pay off your debt at a lower, tax deductible rate and invest your savings.
VA (Veteran’s Administration) Mortgages
The VA provides mortgage guarantees to active duty and ex-servicemen who meet certain eligibility requirements. (To read requirements click here.)
Like with FHA loans, government guarantee makes it easier for low and moderate income veterans and active duty service personnel to obtain mortgages.
The current VA guarantee is $89,912. It is raised periodically.
125% Mortgages
If you want to bet house prices will rise, some lenders will lend you up to 125% of value of your house. If you’re right, you’re okay. Otherwise be prepared to have your checkbook available when you sell your house.
I’m sure that there are other financing options available that I haven’t covered and don’t even know about. But most of main financing types are covered here.
Chris Cooper is a retired attorney who is very familiar with debt, being in it too many times in his life. These articles pass on some of the knowledge he has gained striving to become debt free. He is editor-in-chief of http://www.credit-yourself.com a website devoted to debt management
