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The mortgage market is much more diverse than some
borrowers think.
| Besides the standard fixed-rate
and adjustable-rate mortgages, there are other types of
mortgages and ways to finance a home. |
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Jumbo
mortgage
This is considered a nonconforming loan because it exceeds the loan
limit set by Fannie Mae and Freddie Mac, the two publicly chartered
corporations that buy mortgage loans from lenders, thereby ensuring
that mortgage money is available at all times in all locations around
the country. The single-family limit changes annually and the current
limit is always posted on Bankrate. If you need to borrow more than
that, you will need a jumbo mortgage, which generally has a higher
interest rate than "conforming" loans. Bankrate.com also
surveys jumbo mortgage rates.
Pro: Opportunity to buy larger,
more expensive home.
Con: Pay a higher interest rate in exchange for the lender's
higher risk.
Two-step
mortgage
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.
Pro: Opportunity for damaged-credit
borrowers to buy homes and to establish better credit.
Con: 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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Chapter 2: How mortgages work
