It appears that everything in the world is getting complicated today, and mortgage loans are no exceptions. No longer can we hope to just be offered a 30 year conventional fixed term mortgage like grandma and grandpa were.
“Progress” is the mortgage market has meant that there is a wide variety of the types of mortgages banks are offering. This means we change jobs more and need to move to a new location and that we aspire to more so that we may move because we can afford a bigger home or one in a nicer neighborhood.
Another reason that mortgage loans are more complicated is that the other financial markets are more complicated, and new instruments have to fit the need.
If you are interested in learning something about this incredible array of home loan products available, here is your opportunity.
It’s a lot different than the old days.
Conventional loan: This is a mortgage that has no government warranty.
Government loan: Any loan that is either guaranteed or managed by one of the federal or state agencies.
Conforming loan: Two large quasi-governmental agencies (Fannie Mae and Freddie Mac) guarantee certain loans that meet with their own criteria. There are also referred to “A” paper home loans.
B, C loan: These are mortgages that will not be guaranteed by Fannie Mae and Freddie Mac because they do not conform. Loans of this type are usually granted to people who do not have good credit, such as people with recent bankruptcies or foreclosures. Many times, they are used as temporary mortgages until a conforming loan can be put in place.
A Jumbo Loan is a type of non conforming loan, but it does not conform because of its size, since the federal agencies have a limit on the size of the loans they will guarantee. A jumbo mortgage will carry a higher interest rate since the market for these loans is somewhat illiquid.
Fixed rate loans: This is the traditional loan such as grandpa would have known about-fixed term, fixed rate. This type of mortgage carries a consistent monthly loan payment, since the interest rate is fixed. Fixed rate mortgages are available for 10, 15, 20, 25, 30 and 40 year terms, however the 15 year and 30 year terms are most common. If you have a mortgage with a shorter maturity, you will normally have a loan with a lower rate and the reason for this is that banks can’t fix low rates too far in advance.
A Balloon loan is an interesting hybrid between a long term loan, because of its payment schedule, and a short term loan, because of its due date. These loans have lower interest rates, but because they have to be fully paid upon maturity, there is a chance that interest rates will be higher when they are paid down.
Adjustable Rate Loan: Since banks try to limit the amount of interest rate volatility they have, they now prefer to lend with adjusting rate mortgages, where the rate on the loan is adjusted at fixed intervals, based on a standardized index (TBills, CDs, etc.).
What is truly confusing is the number of types of mortgages that the average prospective borrower has to choose between, and how each loan is individualized for each borrower! But because these loans are so complex, a potential borrower should talk to a mortgage consultant to completely understand the commitment he is making.
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