Determining the right Mortgage for you can be the most difficult part of the process. Below I have put together explanations of various mortgage products that are available today. These are the various types of mortgage loan categories. I have put specific loans, features and guidelines on the Which Loan is for You? page. Not every loan is available for every person and I’ve tried to give you some of the reasons people choose that product over another. There are thousands of loan programs available at any given time.

The loan that is right for you will be determined by many circumstances, only one of which is your qualifications for that loan.  Some folks choose to go with a fixed rate because of the security in knowing their payment will not go up over time. Many first-time homebuyer programs offer only a fixed rate option due to the stability.  Since most of the guidelines for these programs allow for a low down payment and higher monthly debt ratios, lenders feel more confident in a borrower’s ability to make the payments down the road if the rate is fixed. Some borrowers are comfortable with adjustable rate loans or buydowns.  They may have an indication of market changes or future relocation plans that enter into their decision.

Either way, I have tried to give you as much information as I could to help you understand the programs available. All loans are different even if they are in the same category. Please get full disclosures from your lender before you choose which loan you are going to use. Remember, though, a mortgage is a way to finance a home, not a reason to.

This is the most popular option for home financing. It gives people the security of knowing their payment will not change over the life of the loan, but low monthly payments. There is very little principal repayment over the first few years. Most borrowers pay these loans off in around eleven years, either through the sale of the property, a refinance or prepayment.

Very popular as a refinance or for a move up borrower who likes the security of a fixed payment and wants to pay the loan off more quickly. This loan requires a larger monthly payment than its thirty year cousin, but principal reduces much more rapidly because of this. Some folks who like the security of a fixed and the low payments, but want to pay the loan off early, use the thirty year fixed rate and add regular additional payments to principal.

You will also find other terms for fixed rate loans like 25 years, 10 years and even 40 years. With a competitive market for 15 and 30 year terms, though, you may not get a benefit of a better rate for the shorter term. Since so many lenders offer a fixed rate 15 year loan and few offer a 10 year, you may find a better 15 year rate even though it makes sense that the shorter term should be cheaper.

This category encompasses a lot of different loans. There are lots of differences between these loans, but there are several features that are the same for every adjustable rate mortgage (ARM). All ARMs adjust based upon some index value and to that the lender adds your margin which is fixed for the life of the loan. Several popular indices are the treasury securities based upon the one year treasury. You may also hear about the MTA or monthly treasury average. This is gaining popularity as a more stable index due to the averaging aspect. The COFI loan is tied to the 11th district cost of funds. Mortgage loans can and are tied to other indices like the LIBOR, London Interbank Offered Rate and the Prime Rate. The index rate plus a margin add up to the true interest rate on your loan, subject to your caps. There are usually two or three caps. There is the periodic cap (the most your rate could go up or down every time it adjusts), the lifetime cap (the maximum it could ever move), and some have an initial cap (the amount the rate could increase or decrease after the initial adjustment period). For example, a 5/1 ARM has an annual adjustment after an initial period of five years. If the loan has caps of 3/2/6 it means that the loan could move 3 percent over the start rate after five years and then increase or decrease by only 2 percent every year thereafter. If rates go up, the highest rate you would be charged would be 6 percent over the initial rate of your loan. There are other features of these loans you need to ask about as well. Find out if the loan is assumable, and what are the conditions and liability releases. This allows someone to take over the loan under your original terms. Some ARMs also have a conversion feature. This is handy in times when interest rates dip down. A conversion option allows you to fix the rate on your loan to the current market without refinancing. The so-called "mid-term ARMs" include the 10/1, 7/1, 5/1 and the 3/1 ARMs. The short term ARMs are the1 year ARM and 6 month ARM.

Traditionally this program is offered in times when we have a buyer’s market and sellers are offering to pay closing costs for purchasers. It allows a borrowers to pay at a lower payment in the first few years of their fixed rate by prepaying interest in the form of points up front. For example, a 2/1 buydown has a payment rate 2 percent below the note rate the first year and 1 percent below the note rate the second year. In the subsequent years, the borrower repays at the note rate. Although this program is used mostly with fixed rate loans, some lenders will allow it on their mid-term ARMs like the 3/1, 5/1, 7/1 and 10/1 programs. Most of these are paid for by taking the exact difference in payments between the higher and lower payments and requiring the difference to be paid up front as points. This usually amounts to 2.75% of the loan amount. There are also "lender funded" buydowns that cost much less, like 2.375% of the loan because the lender takes into consideration the time value of money and the use of those points and fees for several years.

As an alternative to fixed rates, these loans are popular because they are fixed for a period of time, usually five or seven years. They are amortized over thirty years to keep the payments low and the rates are considerably lower than the thirty year fixed comparable loans. These loans have a lump sum payment due at the end of the balloon, though. I usually recommend them for folks who are positive that they only need the loan for the period shorter than the balloon period. Most of these loans have a conditional refinance option for the remainder of thirty years. The conditions stated that you must still occupy the property as your residence, no late payments were made in the previous twelve months, no secondary financing encumbered the property and interest rates were not greater than five percent above your start rate.

I wasn’t sure whether to put this here or under specific loan programs. It is more of a feature to any loan than a category. PMI, private mortgage insurance, is usually required for conventional or non-conforming loans that have a loan-to-value of greater than 80%. This means the borrower put down less than 20% as a down payment. Less than a 20% down payment increases the lenders risk of default and greatly increases the lender’s costs if foreclosure occurs. To reduce their risk, and increase their ability to lend, mortgage companies require mortgage insurance or other risk reducing factors. PMI is an insurance and is currently a non tax deductible item for homeowners. The lender will usually allow you to avoid PMI payments by combining a first trust mortgage of 75-80% and a second mortgage for the balance of your downpayment. You may also avoid a direct payment by increasing the interest rate to the lender and requiring the lender to pay the insurance for you. There are also lenders that have portfolio products with a higher rate, but no PMI. These programs are typically referred to as self-insured loans.

Whether you are buying your first home or your tenth, you are probably looking for purchase money to mortgage your new home. With very few exceptions, all of the loan programs that are available for purchases are available for Refinance as well. The maximum loan to value limits may be lower. With a refinance loan you will be asked if you want a "cash out" or a "rate and term" refinance. Cash out means that you are receiving money back over and above the payoff of your current liens and the closing costs for this transaction. If you are paying off non-mortgage debt at closing, it is also considered "cash out". "Rate and term" means you are only borrowing enough to pay off the mortgages and costs. You may encounter the term "seasoning", also. This does not mean salt & pepper, but refers to the amount of time you have owned the property or, more likely, have had your current loan.

Home Equity loans come in two different types. A home equity loan is usually a fixed rate loan over a specific period, like 10 -15 years. Folks use this to finance a certain purchase or debt consolidation and plan to pay it off over time. A Home Equity line is usually a variable rate mortgage that has a teaser rate, then adjusts based upon the index plus margin. Payments are based upon the outstanding balance and you can pay down or borrow back up to the lien limit over the variable portion of the loan. If you borrow $10,000 and use only $3,000, you have $7,000 you can use later. If you pay off the $3,000, you can still use $10,000 without applying again. This option is
preferred by folks who have short term cash flow needs. The interest rate is usually a little higher for this type of loan, but if you clear the balance often, you would pay less interest. If you are selling a property, but need the equity to purchase and close on another property before yours closes, you may want to look into a Bridge Loan. This is a short term loan that taps the current equity in your home with the expectation that it will be paid off when you sell your home, soon.

If you plan to build or fix up a home substantially, you should be shopping for a Construction / Permanent loan. This is a commercial loan that allows you to acquire a property, build the home, or rehab it, and then put your permanent financing in place. Some lenders require you to use two loans and go through two closings. Others can save you money by providing one loan and one closing for the whole transaction. A very popular program for fixing up a home is the 203k program sponsored by FHA. The guidelines can be a little tricky and I recommend contacting an experienced loan officer before fixing up a home with one of these loans. You can have a relatively low down payment, but there are other specific parameters that can make it difficult. Fannie Mae also has a renovation or Re-Hab loan.

Most of these loan programs apply to Purchase, Refinance, Permanent, or Home Equity loans. Check with your lender for specifics.

This is a generalization of the terms of these loans. Please check with your lender for specifics regarding your loan.