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Types of mortgage loans - Compare and choose the best option

Posted on: 08th Dec, 2005 08:23 pm
The mortgage industry offers a variety of loan programs suitable for a wide range of borrowers. There are loans that require high payments but there are also programs specially developed to provide homeownership opportunities to low-income families. These mortgages have special features and one really needs to get a brief idea of their pros and cons before he applies for it.

This section provides you with an explanation of mortgage types and their features. Apart from highlighting the types of mortgage loans, this section also mentions who all are suitable for the different types of mortgages. The purpose is to help you explore the features of various types of mortgage loans so that you can compare and choose the one that's best for you.


Types of mortgagesFeaturesEligible Borrowers

Fixed rate mortgage
(40, 30, 15, 10 years)
Fixed rate of interest and hence fixed Monthly payments throughout the loan term.
  • Borrowers who are planning to occupy the property for at least 10 years.
  • Those who don't prefer higher payments.

10/1 year ARM

Interest rate and the monthly payment remain the same for 10 years. From the 11th year, the rate is adjusted every year. This will change the payments each year for the rest of the loan term.
  • Intend to occupy the property for more than 10 years.
  • Like to make stable payments initially but can afford higher payments later on.
    OR
  • Plan to leave the property within 10 years.
  • Want to continue with the loan even if there are changes in the plan.

7/1 year ARM

Interest rate and monthly payments remain fixed for the first 7 years. From the 8th year, interest rates are adjusted every year. The payments are thus changed every year till the loan period is over.
  • Plan to stay in the property for more than 7 years.
  • Prefer stable payments initially but can keep up with higher payments later on.
    OR
  • Plan to vacate the house after 7 years.
  • Want to carry out with the loan in case the plan changes.

7/23 (2-Step)

Fixed rate and monthly payments for first 7 years. On the 8th year, the interest rate is adjusted according to prevailing market rates. The resulting payments will remain constant for the remaining loan period.
  • Plan to occupy the property for more than 7 years.
  • Those who can afford just 1 payment adjustment.
    OR
  • Those who plan to move out within 7 years.
  • Those who want to continue with the loan in case there is any change in the plan.

5/25 (2-Step)

Interest rate and monthly payment remain the same for the first 5 years of the loan period. The rate is adjusted on the 6th year to reflect the prevailing rate. The resulting payment remains constant throughout the rest of the loan term.
  • Borrowers intending to stay in the property for more than 5 years.
  • Those who can bear with one payment adjustment
    OR
  • Borrowers who plan to move within 5 years.
  • Those who want the loan to remain in force in case of any change in the plans.

5/5 and 5/1 year ARM

For the first 5 years, the interest rate and monthly payment remain constant. But from the 6th year, the rates adjust after every 5 years and 1 year respectively.
  • Those who can put up at the property for more than 5 years.
  • Borrowers who like stability in monthly payments initially although there may be increase in payments later on.
    OR
  • Those who may leave the house within 5 years.
  • Borrowers who want to continue with the loan in case plans change.

3/3 and 3/1 year ARM

The interest rate and monthly payments remain fixed for the first 3 years. From the 4th year, the rates are adjusted in every 3 years and 1 year respectively.
  • Borrowers who plan to stay in the property for than 3 years.
  • Those who can accept initial payment stability and any changes later on.
    OR
  • Borrowers willing to abandon the property in less than 3 years.
  • Those who want the loan to remain in force in case of any change in the plan.

1 year ARM

The interest rate is adjusted every year as a result of which the monthly payments also vary each year for the entire loan term.
  • Borrowers who want to take advantage of low rates.
  • Those who can bear additional costs due to yearly payment changes.
    OR
  • Borrowers who cannot qualify for high rate loan programs.

5 year Balloon Mortgage

Interest rate and monthly payments remain unchanged for the first 5 years. After 5 years, the borrower must refinance the loan (which is largely due) at the prevailing rates.
  • Borrowers who plan to occupy the residence for more than 5 years.
  • Those who can refinance their previous loans at the prevailing market rates.
    OR
  • Those who intend to vacate the property within 5 years.
  • Those who like stability in payments.

7 year Balloon Mortgage

Interest rate and monthly payments remain fixed for 7 years. At the end of 7 years, the borrower should refinance into a new loan at the prevailing market rates.
  • Borrowers who want to live in the property for a time period exceeding 7 years.
  • Those who can refinance at the available market rates.
    OR
  • Those who are planning to move out of the property within 7 years.
  • Borrowers who prefer payment stability.

Related Articles
i own a home and 5 acres and another house that i rent out monthly. i have 3years and 10 months left on my chapter 13 , my problem is that with the economy right now, my income has dropped and i am behind on my payment i just got Feb. payment in and am working on March payment and its April. since i haven't been on time with my payments , can i still qualify for a home mortgage that would pay off my chapter 13 and give me a lower payment each month?
Posted on: 04th Apr, 2009 09:26 pm
Hi scp,

The credit score of 499 is not impressive at all and under the current market scenario, it is very difficult for you to qualify for a loan. If most of the negative items are repeats on the credit or charge offs that have been paid, you should first try and remove those items from your credit report and then go for a new loan. It will help you qualify for a loan at an affordable rate and terms.
Posted on: 08th Apr, 2009 02:58 am
hi

david, the way the current market is behaving, you might not be able to get a new loan to pay off your chapter 13. instead, i think you should try and get your existing loan modified. a modification of loan under chapter 13 bankruptcy is possible, subject to the bankruptcy trustee's approval. this will help you lower your monthly payments and be current on the loan.
Posted on: 08th Apr, 2009 03:48 am
hello, i filed chapter 7 bankruptcy 1 year ago.i have a credit score of 637. my husband has a score of 647. he was not part of the bankruptcy. i would like to get a loan as a first time homebuyer. he owns a home. i have never bought one. will i be able to get a loan 1 year after bankruptcy to purchase or home or should we purchase together? we make approx. 80,000 a year and we have both been at our jobs for at least 10 years. thank you!
Posted on: 13th Apr, 2009 12:07 pm
Hi

Have you been discharged from chapter 7 bankruptcy? To get loans on good rates and terms, you should wait for atleast 2 years after a discharge. Not many lenders would be interested in offering you a loan after a chpter 7 bankruptcy. Those who would offer a loan, will charge a high rate of interest from you. You can purchase the home together. But I think you won't be able to avail the first time buyer tax credit in that case..
Posted on: 14th Apr, 2009 06:59 am
i want to lower my rent
Posted on: 15th Apr, 2009 09:24 am
please help refinenance
Posted on: 15th Apr, 2009 09:25 am
hi silverfox,

are you the same person as tracy?

well, i need some more information to understand what the issue is and whether or not a refinance is an option for you. what is your credit score, by the way? do you have a stable income?

thanks,

jerry
Posted on: 16th Apr, 2009 07:00 am
How does a v.a. loan worl
Posted on: 21st Apr, 2009 08:22 pm
How do I get a loan to do this?
Posted on: 07th May, 2009 07:29 am
patfrank: to obtain a va loan, you must be a veteran. you can borrow up to 100% of the price of a home. rates are quite fair, equivalent with rates on fha and conventional loans.

cleeclee: "do this" means what? in order to get a loan at all, you must qualify. that means a lender must review your credit, your income and debts, you assets, etc.
Posted on: 07th May, 2009 07:49 am
I purchased a home back in '99 using the available VA loan option. Due to circumstances, I refinanced in '04, and am now paying on a conventional mortagage (with the dreaded PMI). My question is, could I have refinanced using the VA route?
I know it's possible to use the VA option if your prior use was 'assumed' but isn't that essentially what I've done is 'assumed' the mortgage?
Posted on: 12th May, 2009 12:48 am
Hi

You could have refinanced using the VA route through a streamline VA refinance or some other VA approved refinance programs. What I understand by 'assumption' is that this is a process of taking over the responsibility of mortgage from the original borrower. But when you refinance I don't think you take over the loan liability from someone else. So, I don't think you 'assumed' the mortgage when you refinanced the loan.
Posted on: 15th May, 2009 06:26 am
i borrowed 48,000.00 dollers from a morgage broker at 14% intrest and a one year morgage i was despert at the time so for i have payed back 21,000.00 and still owe 33,000.00 the home i put up for calatearl is not even worth 50,000.00 is this a legal process and is there a loan that i can qulify at a lower intrest
Posted on: 16th May, 2009 08:12 am
No way of knowing what you qualify for without more details.
Posted on: 16th May, 2009 08:12 pm
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