|
| |
Mortgage Terminology
The following definitions offer simple
explanations of the most common types of home loans in the United States.
Adjustable
Rate Mortgages (ARMs)
|
|
|
Fannie Mae began offering the
adjustable-rate mortgage (ARM) in the early '80s, when long-term
interest rates were high and people needed a new type of
financing to buy homes. These products start out with a lower
interest rate, then the interest rate adjusts periodically. If
you're confident that your income will increase steadily over
the years, or if you plan to move in a few years and aren't
concerned about potential rate increases, you may want to
consider a Fannie Mae adjustable-rate mortgage. With an ARM,
your interest rate may move up or down as market conditions
change. Interest rate changes typically are subject to two caps,
one for each adjustment period and one for the life of your
loan. When discussing ARMs with your Fannie Mae-approved lender,
be sure to ask what the maximum interest rate adjustments can be
for any ARM product you consider. Fannie Mae-approved lenders
offer a wide array of adjustable-rate mortgages.
|
|
|
|
|
|
Fixed-rate mortgages, the most popular type of mortgage, offer the peace
of mind that your interest rate will remain the same for as long as you
have your loan. If you expect to live in your home for many years, having
the same interest rate may be your key concern. If you decide that you
like the stable, predictable payments of a fixed-rate loan, you have the
option of choosing from a variety of repayment terms: 15, 20, and 30 years
are the most common. Typically, the longer the term of the mortgage, the
more interest you pay over the life of your loan. However, stretching out
your repayment term means your monthly mortgage payments will be less than
they would be with a comparable shorter-term mortgage. Fannie Mae-approved
lenders offer a wide array of fixed-rate mortgages.
|
|
|
|
The most popular type of mortgage, the 30-year fixed-rate loan, is
most appealing to borrowers who want to stay in their homes for a
long period of time and who want to enjoy consistent payments during
this period. Other benefits include keeping housing expenses to a
minimum while maximizing mortgage interest deductions for income tax
purposes.
Advantages:
- Can require a low down payment, sometimes only 3 or 5 percent
- Consistent monthly payments
- Stable payments, monthly payment will not increase
- Provides maximum interest deduction for tax savings
- Eligible properties include one- to four-family,
owner-occupied principal residences; second homes and investment
properties; and condos, co-ops, and planned unit developments.
Manufactured homes are also eligible. (Manufactured housing
units must be built on a permanent chassis at a factory and then
transported to a permanent site and attached to a foundation.)
|
|
|
With a 20-year fixed-rate mortgage, you build up equity in your home more
quickly and save quite a bit of interest over the life of your loan. As
with all fixed-rate mortgages, the interest on your loan never changes,
bringing you peace of mind that your principal and interest payments will
remain level over time. However, higher monthly mortgage payments may make
it more difficult to qualify for compared to the 30-year fixed-rate
mortgage.
Advantages:
- You pay less interest over the life of your loan, compared to a
30-year fixed rate mortgage. For example, on a $100,000 loan at 8.25
percent interest, the 20-year fixed rate mortgage can save you over
$65,000 in interest payments when compared to a 30-year mortgage.
- Interest rate payments in the early years of the mortgage are
comparable to a 30-year mortgage, allowing for a sizable mortgage
interest tax deduction.
- Your monthly payments are significantly less than for a 15-year
mortgage, allowing you a greater chance to qualify for this type of
mortgage.
- Eligible properties include one- to four-family, owner-occupied
principal residences; second homes and investment properties; and
condos, co-ops, and planned unit developments. Manufactured homes are
also eligible. (Manufactured housing units must be built on a
permanent chassis at a factory and then transported to a permanent
site and attached to a foundation.)
|
|
|
|
This fixed-rate mortgage is designed for borrowers who wish to
accumulate equity in their homes quickly, but need a low down payment
and low monthly payments. It is particularly well-suited to borrowers
who are paid every two weeks by automatic deposit, because payments must
be automatically drafted from the borrower's account every two weeks. If
you want stable payments and seek to build equity in your home more
quickly, this type of loan may be for you. It is available for most
fixed-rate mortgages.
Advantages:
- You save the amount of interest paid over the life of the loan,
which will help you pay your mortgage more quickly than by making
payments monthly.
- Your mortgage payment is usually deducted automatically from a
deposit account, saving you the cost of postage to mail your
payment. Additionally, you may find it's easier to manage your
finances by having your mortgage paid at the same time you receive
your paycheck.
- Interest is calculated amortizing the mortgage every 14 days,
using a 365-day calendar year, resulting in 26 (27 in some cases)
payments a year.
- Biweekly mortgages can be used to buy one-family, principal
residences, including condos and planned unit developments.
Manufactured homes are also eligible. (Manufactured housing units
must be built on a permanent chassis at a factory and then
transported to a permanent site and attached to a foundation.)
|
|
|
|
The Fannie Mae seven-year balloon
mortgage is a type of fixed-rate mortgage with a term of seven years.
The principal and interest you pay are amortized over a longer period
(30 years) than the actual term of the mortgage. At the end of the
balloon period, you may pay off the outstanding balance with a lump-sum
payment or exercise the option to refinance for the remaining term. The
option to refinance is conditional, meaning you have to meet certain
conditions (such as a history of timely payments or no second liens on
your property).
- Ideal if you plan to sell or refinance your home within seven
years and want a low monthly payment during that time. The interest
rate you pay on a balloon mortgage is usually lower than a
comparable 30-year fixed-rate mortgage.
- With a refinance option at the end of seven years, you have a
"safety net" in case a planned relocation doesn't take
place or economic conditions prevent you from moving to a larger
home. (You may want to understand all the conditions needed for a
refinance before getting this loan.)
- You need not re-qualify for this loan when refinancing at the end
of seven years as long as the new interest rate is not more than 5
percent above the current interest rate.
- The refinance condition is not automatic - you must exercise the
option.
- Refinancing conditions may include payment of closing costs and a
lender fee, as well as no 30-day late payments in the previous 12
months and no other liens on your property.
- You must occupy your property at the time of refinancing.
- This mortgage can be used to buy one-family, principal residences,
including condos and planned unit developments. Manufactured homes
are also eligible. (Manufactured housing units must be built on a
permanent chassis at a factory and then transported to a permanent
site and attached to a foundation.)
|
|
|
|
You pay off a 15-year fixed-rate mortgage in half the time you pay off
the traditional 30-year fixed-rate mortgage. This shorter term makes it
possible for you to build up equity in your home faster, which can let
you move up more quickly to a more expensive home or save more in
preparation for retirement or a child's education. This loan is
particularly attractive if you're refinancing your mortgage because you
shorten your loan term plus enjoy a lower interest rate - 15-year
mortgages are usually offered at interest rates lower than those
available with 30-year mortgages. However, higher monthly payments may
make it more difficult to qualify for compared to the 30-year fixed-rate
mortgage.
- Offers a lower interest rate than a 30-year or 20-year mortgage.
- Saves you a significant amount of interest over the life of the
loan. For example, with a $100,000 loan at 8.25 percent interest,
the 15-year mortgage will save you $95,000 in interest payments over
the life of your loan, compared to the same mortgage amount for a
30-year term. However, your monthly mortgage payments will be
higher.
- This shorter-term mortgage allows you to own your home outright
sooner.
- Eligible properties include one- to four-family, owner-occupied
principal residences; second homes and investment properties; and
condos, co-ops, and planned unit developments. Manufactured homes
are also eligible. (Manufactured housing units must be built on a
permanent chassis at a factory and then transported to a permanent
site and attached to a foundation.)
|
|
