Other Types of Mortgages
Introduction
Borrowers don't realize how diverse the
Mortgage industry is. There are
other types of mortgages and ways to finance a home besides the standard fixed
Rate and adjustable rate mortgages. Some of the other types of mortgages include:
- Construction mortgages
- Seller financing
- Assumable mortgages
- Two-step mortgages
- Jumbo mortgages
- Balloon mortgages
Construction Mortgages
If you are looking to build a home rather than buy an existing one, then a
Construction Loan is for you. This is done in a two-step borrowing process. For the duration of construction, borrowers pay higher rates, during which time they draw money to pay their builders, paying only
Interest on the outstanding amount. Then, the loan usually converts to a traditional, long-
Term fixed rated structure, which is like a second
Closing.
Seller Financing
An agreement in which the seller of the home provides financing to the buyer is where seller financing comes into play. The buyer makes monthly payments to the seller instead of the bank. The property is used as
Security in the promissory note. This type of financing often includes an
Assumable Mortgage.
Assumable Mortgage
Assumable mortgages are somewhat uncommon. With this kind of loan, a homeowner can hand over the loan to a buyer instead of paying it off using the proceeds from the home sale. If you can get an assumable mortgage and the rates are low, then it is a good idea. If the rates rise, buyers will want to assume your loan (and might be willing to pay more for your house) because it will be much cheaper than any loan they could get from a bank or other source. The disadvantage about assumable mortgages is that sellers can charge more for houses, so buyers need more cash to cover the difference between asking price and loan balance. The advantage is that it reduces monthly payments and saves money on
Closing Costs.
Two-Step Mortgages
Two-step mortgages combine elements of fixed and adjustable rate mortgages. They have confusing names such as 2/28, 5/25 or 7/23. A
Two-Step Mortgage features a fixed rate and payment for an initial period, followed by one adjustment, then fixed rate and payment for the remainder of the loan. A 7/23, for example, has an initial period of seven years, an adjustment, and then 23 more years of payments following the adjustment. A disadvantage of a two-step mortgage is if your
Credit does not improve, you could be stuck in a high-rate loan for much longer than two or three years. An advantage is the opportunity for damaged-credit borrowers to buy homes and to establish better credit.
Jumbo Mortgages
Jumbo mortgages are uncommon because it exceeds the loan limit set by
Fannie Mae and
Freddie Mac, the two publicly chartered corporations that buy mortgage loans from
lenders, thereby guaranteeing that mortgage money is available at all times in all locations around the country. The single family limit changes annually and the current limit is always posted on most mortgage websites. If you need to borrow more than that, you will need a jumbo mortgage, which generally has a higher
Interest Rate than "typical" loans. A disadvantage of having a jumbo mortgage is paying a higher interest rate in exchange for the
Lender’s higher risk. An advantage is having the opportunity to buy a larger, more expensive home.
Balloon Mortgages
Balloon mortgages give borrowers a lower rate and payments for a specific period of time. This can be anywhere from three years to ten years. At the end of the loan, the
Borrower has to pay off the
Principal balance in a lump sum. Under certain terms, the mortgages can be converted to fixed rate or adjustable rate loans. Many borrowers either end up
Refinancing their balances into new mortgages or selling their homes before their due dates. A disadvantage of having a balloon mortgage is that sometimes plans change. If you end up deciding to move or something else comes up, you will have to pay off or refinance the balance, which takes time, effort and more closing costs. An advantage is saving money on mortgage costs initially, which is a great option if you don’t plan on living in the home long.
