loan types

Different types of loans including an explanation of Fixed-Rate loans, Adjustable-Rate loans, Convertible Mortgage Loans, and Balloon Mortgage Loans.

Major types of mortgage loans include:

Fixed-Rate Loans

Fixed-rate fully amortizing loans are the most popular type of mortgage loan, as they offer a monthly payment that does not change over time, and result in a portion of the loan’s principal being paid down every month. Many borrowers find fixed-rate home loans to be a great mortgage for their needs. Nearly all mortgage lenders including mortgage bankers and mortgage brokers, offer fixed-rate mortgages in all of their Conventional, FHA, VA and Jumbo loan products.

Fixed-Rate mortgages are available at various term lengths. A 30-year1 amortizing loan typically has lower payments than a 15-year loan, but a slightly higher interest rate than a 15-year2 loan. To pay off a fixed-rate loan sooner, check with your servicing lender to ensure these extra principal payments are accounted for in the correct manner so they get recorded correctly to your account. Most monthly mortgage statements have a box for you to enter the amount of extra principal you are making. In most circumstances, you should be permitted to make these additional principal payments anytime and for any amount, and without penalty.

Adjustable-Rate Loans

An adjustable-rate mortgage has a short-term fixed-rate term during which an interest rate is fixed. After this initial term, the interest rate on an adjustable-rate mortgage or “ARM” loan can change periodically at certain intervals. This adjustment permits the lender to adjust the interest rate to match changing interest rate environments. For example, a 3/1 ARM3 loan offers a fixed-rate for the first three years, adjusting once a year thereafter. A 5/1 ARM4 loan offers a fixed-rate for the first five years, adjusting yearly thereafter.

At each adjustment the lender sets the interest rate by adding a margin or spread to the then current index rate.

Common indexes used in adjustable-rate loans include:

The 11th District Cost of Funds Index: The Eleventh District of the Federal Home Loan Bank Board, which covers California, Nevada and Arizona, publishes a Cost of Funds Index. For more information on the index, visit the Web site of the Federal Home Loan Bank of San Francisco.

The Treasury Bill Index: The yield on the 1-year T-bill, adjusted for a constant-maturity security, is widely used. Most ARM loans have a periodic rate cap and lifetime cap to limit the amount the interest rate can increase each adjustment period and over the term of the loan, respectively.

Libor-based indexes: Libor, or the London Interbank Offered Rate index, is frequently used by lenders as many international investors in Mortgage-Backed Securities prefer this index. There are 1- month, 6- month, and 1- year Libor indexes used in many Conventional, FHA, VA and Jumbo loans.

What is negative amortization? While many adjustable-rate loans have periodic caps that limit the extent to which an interest rate can rise or fall during an given period of time, some adjustable-rate loans have a payment cap which limits how high the actual mortgage payment can rise in dollars, as opposed to limiting interest rate changes. Unfortunately, in many cases, while the actual mortgage payment in dollars may seem attractive to your monthly budget, that “capped” mortgage payment may not cover the actual interest owed during a given payment period, and you may face negative amortization of your loan. Negative amortization has the effect of increasing the amount you owe on your loan every month, as opposed to paying down your loan every month, with a normal fully amortizing loan.

1. 30 Year Fixed: Loan amount $300,000, 20% down, monthly payment without taxes and insurance $1,475.00, APR 4.389%.

2. 15 Year Fixed: Loan amount $300,000, 20% down, monthly payment without taxes and insurance $2,256.84, APR 4.495%.

3. 3/1 ARM: Loan amount $300,000, 20% down, monthly payment without taxes and insurance $1,475.82, APR X.XXX% The payment or rate is subject to adjustment after 3 years. The rate may vary or payment may increase after this period.

4. 5/1 ARM: Loan amount $300,000, 20% down, monthly payment without taxes and insurance $1,475.82, APR 7.143% The payment or rate is subject to adjustment after 5 years. The rate may vary or payment may increase after this period.

Specialty Loans

USDA

100% financing with no down payment (USDA loan program offers no down based upon certain qualifying factors)
Flexible Underwriting!
Properties must be located in eligible rural areas (generally towns with a population of 20,000 or less that are removed from an urban area)
No cash reserves are required
Borrowers are not required to be first time homebuyers
No Loan limit restrictions
Minimum credit score of 620 from most lenders

*Please visit our Disclosures page for more details for all loan types.

VA

One of the only 100% financing programs around
No down payment required (VA loan program offers no down based upon certain qualifying factors)
Must have DD214 with honorable discharge
Fairly reasonable underwriting guidelines
Must be owner occupied
Multi-Unit by two or more eligible veterans may consist of up to 6 family units
Bankruptcy and foreclosures do not necessarily eliminate veteran from qualifying– looking for 2 years in most cases
No cash reserves required