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LESSON 6: OTHER LOANS (INCLUDING SUBPRIME MORTGAGES)
The mortgage market is much more diverse than
some borrowers think. Besides the standard fixed-rate
and adjustable-rate
mortgages, there are many other types of loans out there. Some
borrowers will never have to concern themselves with them, but we'll
review some of the most common "uncommon" loans for those
that will. They include: Jumbo mortgages, Two-step mortgages, Biweekly
mortgages, Balloon mortgages, Assumable mortgages, Subprime mortgages
and Construction mortgages.
Jumbo mortgages
These are loans that exceed limits set by Fannie
Mae and Freddie
Mac, the two government-sponsored agencies that buy mortgage
loans from lenders. We'll talk more about the role of these two
agencies in Lesson
10, but for now, it's sufficient to say they buy only loans
that are for less than a certain dollar amount. That limit adjusts
annually, but in 2001, it's $275,000. Any mortgage for more than
that amount is considered a "jumbo" loan. (Those for less
than that limit are called "conforming"
or "conventional
mortgages.")
The loans Fannie Mae and Freddie Mac can't buy tend to cost
more than the ones they can. So if you need to borrow a big
chunk of change, you're going to pay more. Jumbo rates tend
to be around one-quarter of a percentage point, or 25 basis
points, more than rates on conforming loans, but that rate
difference fluctuates.
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Opportunity
to purchase larger, more expensive home. |
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Pay a higher interest rate in exchange for the
lender's higher risk.
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Two-step mortgages
These are mortgages that combine elements of fixed and adjustable-rate
mortgages. They go by confusing names such as 2/28, 5/25 or 7/23.
A two-step mortgage features a fixed rate and payment for an initial
period, followed by one adjustment, then a fixed rate and payment
for the remainder of the loan term. A 7/23, for example, has an
initial fixed period of seven years, an adjustment, and then 23
more years of payments following the adjustment. They can be good
for borrowers with damaged credit, who use the initial lower payment
period to establish better credit histories by making on-time payments,
then refinance into conventional loans before their adjustment dates.
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Opportunity
for damaged-credit borrowers to buy homes and to establish better
credit |
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If your credit does not improve, you could be
stuck in a high-rate loan for much longer than two or three
years.
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Biweekly mortgages
These are fixed-rate mortgages that feature payments
every two weeks rather than every month. The accelerated payment
schedule results in essentially making 13 monthly -- or 26 biweekly
-- payments each year rather than 12. That shortens the term of
the loan by years and slashes the overall interest bill.
See
Tips
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Good
budgeting tool for people paid biweekly. |
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Less flexibility if an unforeseen financial
problem arises because payments must be made so close together.
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(continued
on next page)
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