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Fixed Rates
A conventional fixed-rate mortgage offers you a set rate and
payments that do not change throughout the life or "term",
of the loan. A conventional loan is fully paid off over a given
number of years, usually 15, 20 or 30.
A portion of each monthly payment goes towards
paying back the money you borrowed, the "principal",
and the rest is "interest". Any money paid into the
value of the house, including your down payment, is known as
"equity" in the home. For instance, if your house
is worth $100,000 and you owe $65,000 on your mortgage, then
you are said to have 35% equity in your house.
Temporary Buy-Downs
"Buydowns" usually refer to a borrower "buying
down" the interest rate on a loan. This is the same concept
as paying "points" on a loan, except that points buydown
(or up) the rate of a loan over the entire term while a buydown
is usually only a temporary reduction.
A temporary buydown on a loan is achieved by lowering
the rate for the first few years, starting out at a lesser amount
and gradually rising to the original loan rate. Of course, because
the loan rate is lower for the initial few years, so are the
payments. To make up this loss of funds to the lender, the buydown
usually consists of extra monies paid up front to the lender
when the loan closes. In return, the lender will let the borrower
"qualify", or meet the criteria for the loan, at the
new, reduced rate.
An example of a temporary buydown on a loan is
a 2/1 Buydown. Assume we have a 30-year conventional loan with
an interest rate of 9%. A 2/1 buydown would make the interest
rate for the first year of the loan equal to 7%, the second
year 8% and 9% from then on. The borrower could qualify for
the loan (under some loan programs) as if it were a 7% loan.
Balloon Loans
This is a special type of conventional, fixed-rate mortgage
with a much shorter term. In a balloon mortgage, the terms and
payments are usually the same as their conventional loan counterpart,
but the balance is due in full on the loan at the end of a specified,
much shorter term.
For example, a seven-year balloon mortgage would
be calculated to have the same payments as a 30-year loan, with
the borrower paying the same amount in interest and principal
each month. However, at the end of seven years whatever balance
is left on the loan is due. At this point, the borrower may
either pay out the loan in full or refinance with a new loan.
Balloons are often priced better than conventional,
fixed-rate mortgages because of the certainty to the lender
of the mortgage term.
Adjustable Rate Loans (ARM's)
An "ARM", or "Adjustable Rate Mortgage"
has a fluctuating interest rate and the potential for changing
payment amounts. In most ARM mortgages, the interest rate on
a loan is fixed for a certain number of years and then allowed
to fluctuate in sync with current economic factors.
An ARM is of value to the lender because the risks
of lending money in a changing economy are passed on to the
borrower. In exchange, most lenders are able to offer a lower
initial interest rate to the borrower in exchange for their
assumption of this risk.
Article continued at http://www.loanlinks.com/loanlibrary/popular_mortgages.html
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