KINDS OF MORTGAGES

There are a lot of different kinds of mortgages out there, but in the end, they all fit into one of three categories.

1. Fixed Rate Mortgage (FRM) A fixed rate mortgage offers a permanent interest rate and monthly payment amount, which is usually higher than the initial rate and payments on an adjustable or balloon mortgages. Fixed rate mortgages come with specific lengths of time – 30, 20, 15 or 10 years.
   
   
   
   • There is no risk that your payments will go up, so it is easy to budget.
     Since both the interest rate and monthly payment on a fixed rate mortgage stay the same for the full length of the loan (15 or 30 years), there is no risk of interest rate increases. Although, your payment might rise if your taxes or insurance rates rise.
   • It comes with a higher interest rate.
     Lenders charge a premium for the security of a fixed rate. They are taking a risk that interest rates will increase and cause their profit on your mortgage to decrease.
   • It is harder to qualify for.
     Since your initial payments are higher with a fixed rate mortgage, lenders won’t let you borrow as much as you can with an adjustable rate mortgage.
     
     
2. Adjustable Rate Mortgage An adjustable rate mortgage (ARM) offers an initial interest rate that will adjust on a regular basis to reflect changes in the market interest rate. Typically the rates for an ARM are lower than a FRM in exchange for taking the risk that rates may rise in the future. There are many types of ARM’s – a 7/1 ARM offers a fixed interest rate for the first 7 years and then will adjust to the current market rates annually for the remaining 23 years of the loan – where a 3/1 ARM the rate will be fixed for only 3 years then adjust annually for the life of the loan.
   
   There are also ARM’s based upon other indexes – a COFI loan is based upon the 11th District Cost of Funds Index – a LIBOR loan is based on the London Inter-Bank Officered Rates – an MTA loan is based upon the Monthly Treasury Average index.
   
   
   
   • A lower initial interest rate
     Since the lender is taking less risk that interest rates will go up and they won’t be able to raise your rate, they offer lower initial interest rates. This means a lower monthly payment, too.
   • You can borrow more
     If the lender is taking less risk, they are willing to loan you more money. So, if you are set on buying your dream home and you can barely afford it, this can be very helpful.
   • Your interest rate might go up
     If interest rates go up, and you stay in the house longer than expected, you may have to face larger payments. If you plan to be in the house for 5 years and get a loan where the rate is fixed for the first 5 years but you end up holding the mortgage for 10 years, your monthly payments will probably rise.
     
     
3. Balloon mortgages A balloon mortgage has a fixed interest rate and monthly payment, but requires payment in full at a specific time. For example a 5-year balloon mortgage will offer a lower rate, but you will have to repay the entire loan balance in 5 years. As you can imagine, this is risky. If you do not have the money to pay back the loan after those 5 or 7 years and you can’t get another mortgage, you are stuck.
   
   
   • It is easier to qualify.
     Since a balloon is effectively a very short loan (five to seven years) the lender is taking less risk. This makes it a lot easier for the lender to qualify you for it.
   • It gives you five or seven years of protection from rate increases.
     If the lender is taking less risk, they are willing to loan you more money. So, if you are set on buying your dream home and you can barely afford it, this can be very helpful.
   • Your initial interest rate is lower than a 30 year fixed loan.
     Since the rate is fixed for only five or seven years, the lender doesn’t need to charge as high of an interest rate as they do on a 15 or 30 year fixed rate mortgage.
   • You are forced to refinance or sell in five or seven years.

Types of Mortgages

Your mortgage will also break out into either a government or conventional mortgage.

Government Backed Mortgage
– FHA The US Department of Housing and Urban Development (HUD) offers subsidized mortgages for buyers who need help qualifying for a conventional loan.

• Requires only a 3% down payment.
• There will not be a prepayment penalty
• You must intend to occupy the home
• You will need a satisfactory credit history
• Have a sufficient income to cover the monthly mortgage payments
• Maximum loan limit in Maricopa County is $148,377.00.
  - VA If you are a military veteran, a VA loan is available to you.
• No down payment required
• No monthly mortgage insurance required
• You must also intend to occupy the property and have a satisfactory credit history and have sufficient income to cover the monthly mortgage payments
• There will be a fee to the VA at closing

Conventional Loan
Conventional loans are held by mortgage lenders that are not backed by the government. Conventional loans can be more flexible with program guidelines.

Home Equity Line of Credit (HELOC) or Second Mortgage
These loans offer you access to the equity that has grown on your home.

A HELOC is usually an adjustable rate loan that allows you to use the line of credit like a credit card. You are given a credit limit and a checkbook. You can write checks that do not exceed the credit limit, repay that loan, and then use that line of credit again by writing another check.

A second mortgage is a fixed rate and term, usually 15 or 20 years.

Which loan is right for you and your financial situation?

• Find a mortgage broker (a broker deals with many different lenders and offers a variety of programs) that you are comfortable with.
• Share your financial status and goals – your mortgage professional cannot help you achieve those goals without knowing what they are!
• Ask them to compare several different programs offered by different lenders for your specific needs.