5. Mortgage Basics - Other Types of Mortgage Loans

Other Types of Mortgage Loans:

Fannie Mae and Freddie Mac are the two publicly chartered corporations that buy mortgage loans from the primary mortgage market, that is, the lenders who make the loans to you. They do this to boost home purchase and stimulate residential housing construction by purchasing loans from conventional lenders and selling them to private investors. Besides the standard fixed-rate and adjustable-rate mortgages, there are other types of mortgages available:

•     Jumbo mortgages
•     Hybrid mortgages
•     Biweekly mortgages
•     Assumable mortgages
•     Seller financing

Jumbo Mortgages:
Loan limits are set by Fannie Mae and Freddie Mac, and are adjusted annually by Congress to reflect changes in prevailing price of average property. For example, the 2001 single-family loan limit is $275,000. Mortgages that exceed the maximum allowable loan amounts are considered jumbo loans, also known as nonconforming loans. These types of loan have a higher interest rate and generally require a larger down payment.

Hybrid Mortgages:
Hybrid mortgages combine elements from both a fixed-rate mortgage and an ARM. There are different types; some hybrid loans begin as a fixed-rate loan, where the initial rate is fixed for a period of three to ten years, after which the loan converts to an ARM, and adjusting every six to twelve months thereafter. Other types of hybrid loans may begin as a fixed-rate loan and then have a one-time adjustment, and remain at a fixed rate thereafter. At the adjustment date, there is no additional refinancing cost or need to re-qualify.

Still another example of a hybrid loan is the balloon mortgage. In this loan, the borrower makes initial payments at a lower fixed rate for a specified period of time, usually from three to ten years, after which the principal balance is due as a lump sum. Under certain conditions, a balloon mortgage can be converted to either a fixed-rate or adjustable-rate mortgage.

Biweekly Mortgages:
A biweekly mortgage is a fixed-rate loan in which payments are made every other week, instead of monthly. In this case, the monthly payment is divided in two and that amount is paid every other week. You are basically making 26 half-payments a year, the equivalent of 13 monthly payments, with the 13th monthly payment going entirely towards paying off your principle balance. If done correctly, this can dramatically shorten the life of your mortgage, taking years off the length of your loan.

Assumable Mortgages:
This is a transaction where the mortgage is transferred to the new buyer of a home. This could be advantageous for the buyer if the interest rate on the assumable mortgage is lower than the current market rate, and can help a seller to speed up the sale of a property. Generally, ARMs are assumable, and fixed-rate mortgages are not. When shopping for an ARM, be sure it is fully assumable an unlimited number of times with the same interest rate caps.

Seller Financing:
This is an agreement between the seller of a home and the new buyer. The buyer will make direct payments to the seller, thereby bypassing the bank or other mortgage lender. This type of financing often involves assumable mortgage.