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CHAPTER IV -- SPECIAL NEEDS? SPECIAL MORTGAGES

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.")

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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.

Benefit Opportunity to purchase larger, more expensive home.
Drawback

Pay a higher interest rate in exchange for the lender's higher risk.

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.
Benefit Opportunity for damaged-credit borrowers to buy homes and to establish better credit
Drawback

If your credit does not improve, you could be stuck in a high-rate loan for much longer than two or three years.

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

Benefit Good budgeting tool for people paid biweekly.
Drawback

Less flexibility if an unforeseen financial problem arises because payments must be made so close together.

(continued on next page)

 

 

TABLE OF CONTENTS

CHAPTER I
  Lesson 1
  Quiz

CHAPTER II
  Lesson 2
  Quiz

CHAPTER III
  Lesson 3
  Lesson 4
  Lesson 5
  Quiz

CHAPTER IV
  Lesson 6
  Lesson 7
  Quiz

CHAPTER V
  Lesson 8
  Lesson 9
  Quiz

CHAPTER VI
  Lesson 10
  Lesson 11
  Quiz

CHAPTER VII
  Lesson 12
  Lesson 13
  Lesson 14
  Quiz

CHAPTER VIII
  Lesson 15
  Lesson 16
  Lesson 17
  Lesson 18
  Quiz

CHAPTER IX
  Lesson 19
  Quiz

CHAPTER X
  Lesson 20
  Quiz

CHAPTER XI
  Lesson 21
  Quiz

CHAPTER XII
  Lesson 22
  Lesson 23
  Lesson 24
  Quiz

CHAPTER XIII
  Lesson 25
  Lesson 26
  Lesson 27
  Quiz

CHAPTER XIV
  Lesson 28
  Lesson 29
  Lesson 30
  Quiz

Definitions





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