Other types of
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.
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 2003 single-family loan limit is $322,700. The maximum loan amount is 50 percent
higher in Alaska, Hawaii and the U.S. Virgin Islands. If you need to borrow more
than that, you will need a jumbo mortgage, which generally has a higher interest
rate than "conforming" loans. See the latest Bankrate.com survey of
Opportunity to purchase larger, more expensive home.
Pay a higher interest rate in exchange for the lender's
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.
Opportunity for damaged-credit borrowers to buy homes and to establish better
your credit does not improve, you could be stuck in a high-rate loan for much
longer than two or three years.
This is a fixed-rate mortgage in which payments
are made every other week, instead of monthly. Typically, it is a method used
to shorten the life of a 30-year mortgage. Here's how it works: You take your
monthly payment amount, divide it by two, and then pay that amount every two weeks.
That means you will be paying 26 "half-payments" a year -- the equivalent of 13
monthly payments, with the 13th monthly payment applied entirely to the principal
balance. This simple device has a dramatic impact on the length of the loan --
a 30-year loan can be paid off in about 23 years through this method. The only
tricky part of changing to a biweekly mortgage is in making sure your lender accepts
your payments and correctly credits the extra portion to principal.
Pro: Good budgeting
tool for people paid biweekly.
Less flexibility if an unforeseen financial problem arises because payments must
be made so close together.
With these, borrowers
get lower rates and payments for a specific period, which usually is anywhere
from three years to 10 years. At that point, a borrower has to pay off the principal
balance in a lump sum. Under certain conditions, the mortgages can be converted
to fixed-rate or adjustable-rate loans. Many borrowers either sell their homes
before they get to their due dates or end up refinancing their balances into new
Save on mortgage costs initially -- a great option if you don't plan on living
in the home long.
Plans sometimes change. Will have to pay off or refinance balance, with time,
effort and more closing costs.
Assumable mortgages are relatively rare. A homeowner with an
assumable loan can "hand off" the loan to a buyer instead of paying
it off using proceeds from the home sale. If rates are low and you can get one,
by all means do so. If rates rise, buyers will want to assume your loan (and will
be willing to pay more for your house!) because it'll be much cheaper than any
loan they could get from a bank or other source.
Reduces monthly payments and saves money on closing costs.
Sellers charge more for houses, so buyers need more cash to cover the difference
between asking price and loan balance.
These days, even
people with less-than-stellar credit can buy homes -- as long as they're willing
to pay up for so-called subprime mortgages. These loans have higher rates and
more onerous terms than conventional loans, but they can help bruised-credit borrowers
reap the benefits of homeownership just like their more creditworthy cousins.
Pro: Opportunity for those who
can't prove income, have low credit scores, bankruptcies, too much credit or need
a higher-than-normal loan-to-value ratio on property.
No consistency. Rates, fees and underwriting guidelines vary drastically. Borrowers
need to shop more to find best rate.
help people who want to build homes, rather than buy existing ones. They typically
feature a two-step borrowing process. Borrowers pay higher rates for the duration
of construction, during which time they draw money to pay their builders. Then,
they go through a second closing at which time the loan usually converts to a
traditional, long-term fixed-rate structure.
This is an agreement where the seller
of the home provides financing to the buyer. The buyer makes monthly payments
to the seller instead of the bank. The promissory note is secured by the property.
This type of financing often includes an assumable mortgage.