There are many different types of mortgages on the
market. You don't have to stick with a traditional fixed-rate
mortgage or adjustable-rate mortgage; there are other
types of mortgages that you can use to finance your home
purchase.
Other types of mortgages include: jumbo mortgages,
two-step mortgages, balloon mortgages, assumable mortgages,
construction mortgages and seller-financed mortgages. There are many
other types and forms of mortgages out there, you simply have to do
a little research.
Jumbo mortgage
The jumbo mortgage is a popular type of nonconforming
loan. This is a loan for borrowers who want a mortgage that exceeds
the loan limits set by Fannie Mae and Freddie Mac, the two
corporations that buy mortgage loans from lenders. The single-family
limit changes annually. If you find that you need more than the
traditional mortgage amount, you will have to take out a jumbo
mortgage.
Jumbo mortgages come with higher interest rates than
traditional conforming mortgages, such as 30-year fixed-rate or even
ARMs. The jumbo gives you the opportunity to buy a larger, more
expensive home.
Two-step mortgages
A two-step mortgage is a combination of a fixed
mortgage and an adjustable-rate mortgage. They are often called a
2/28, 5/25 or 7/23. A two-step mortgage gives you a fixed rate and a
payment for an initial period. Then you will have one interest rate
adjustment. After the one adjustment, the rate is then fixed for the
remainder of the mortgage term. For example, a 5/25 has a fixed rate
for the first five years. After the five years, the rate will adjust
to a new fixed rate for the remaining 25 years left on the mortgage.
Two-step mortgages allow borrowers with poor credit to
buy a home and improve their credit. But if they don't improve their
credit, they could be stuck with a high-rate loan for more than two
or three years.
Balloon mortgage
A balloon mortgage gives a borrower a low rate and
payment for a set period of time, usually between three and 10
years. After the time expires, the borrower will have to pay the
principal that remains in one lump sum. Often, the mortgage can be
converted to a fixed-rate or adjustable-rate mortgage. Most
borrowers either sell the home before the due date or refinance the
balance into a new mortgage.
Balloon mortgages offer initial savings for a borrower
who doesn't plan on owning a home very long. But if the borrower
remains in the home, he will either have to refinance or pay off the
mortgage.
Assumable mortgage
An assumable mortgage is rare in today's market. A
homeowner who has an assumable loan can simply give the loan to a
buyer instead of using the proceeds to pay off the home's mortgage.
If rates are low and you can get one, it is worth it. If rates go
up, buyers will want to assume your mortgage, which has a lower
rate, and may be willing to pay more for your home.
Assumable mortgages save you on closing costs and can
be a useful tool in selling a home. But sellers will charge more for
a home with an assumable mortgage, so if you are looking to buy this
type of home, you will need more cash to cover the difference
between the asking price and the loan balance.
Construction mortgage
Construction mortgages help you build your home,
instead of buy an existing home. This is usually a two-step process
in which you pay higher rates during the construction and take money
as needed to pay the builders. During this time, you are usually
only paying the interest on the outstanding amount. After the
closing, the mortgage usually converts to a traditional mortgage
situation.
Seller-financing
When the seller finances the sale of a home, he is
providing the financing to the buyer. The buyer makes monthly
payments to the seller who holds the lien on the property. A
promissory note is used to secure the property. This type of
financing often includes an assumable mortgage
feature.
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