Mortgage Basics, Ch. 2: Jumbo and balloon loans, biweekly payments and other alternative mortgages

Mortgage Basics

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A calculator a house and a $1 bill in the background

mortgage

Other types of mortgages

By Bankrate.com

Table of contents

Chapter 1: Should you buy or rent?

Chapter 2: How mortgages work

Chapter 3: Your mortgage payment

Chapter 4: Paperwork and fees

Chapter 5: Underwriting

Chapter 6: Closing

Chapter 7: Ownership

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.

1. 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 a conforming loan. 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.

2. 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.