With so many mortgage terms to learn, it helps to have a quick glossary at hand when choosing the type of mortgage for you. Here’s our short list of mortgage types and terms to consider when getting ready to borrow. Our Loan Advisors can help you learn more, too.
2/1 Buydown Mortgage
The 2/1 Buy-Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long-term rates. However, keeping the loan in place even for three full years or more will keep their average interest rate in line with the original market conditions.
Adjustable Rate Mortgage
A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).
This loan has a rate that is recalculated once a year.
Buying Down the Rate
When the seller, builder or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage. Buydowns can occur in both fixed and adjustable rate mortgages.
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
Fifteen Year Fixed Rate Mortgage
This loan is fully amortized over a 15-year period and features constant monthly payments. It offers all the advantages of the 30-year loan, plus a lower interest rate—and you’ll own your home twice as fast. The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn’t that great.
Fixed Rate vs. Adjustable Rate
Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).
Fixed-Rate Mortgage (FRM): A mortgage interest that are fixed throughout the entire term of the loan.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
These increasingly popular ARMS—also called 3/1, 5/1 or 7/1—can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable-rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.
With this loan, the interest rate is recalculated every month. Compared to other options, the rate is usually lower on this ARM because the lender is only committing to a rate for a month at a time, so his vulnerability is significantly reduced.
Negative Amortization (Neg. Am) Loan
This is a deferred-interest loan which is very powerful — and the most misunderstood mortgage program because of its many options. Basically, the lender allows the borrower to make monthly payments that are less than the accruing interest. Therefore, if the borrower chooses to make the minimum monthly payment, the loan balance will increase by the amount of interest not paid on the loan. The power of this loan lies in the borrower’s ability to choose between making the full loan payment, or the minimum payment, or any amount in between.
Paying Your Loan Early
Even with today’s low interest rates, the total amount of interest you may pay over the life of your mortgage can seem like a staggering amount. It’s one of the reasons many people set a goal to pay down their mortgages early. But pre-paying a mortgage may not be for everyone. Here are some reasons to consider it:
- Paying your mortgage off will make you completely debt free.
- You want to reduce expenses as much as possible so you can put more money into your retirement fund.
- You plan to move in a few years and will need cash for your next home – for closing costs or for a down payment. Applying more money towards your mortgage balance will increase equity, which can be converted to cash if needed.
- Currently, you do not receive a tax break on your mortgage interest. If your mortgage is small, your interest may not exceed the standard deduction the IRS gives non-itemizing taxpayers. Without that tax break, the actual cost of your mortgage is higher.
- You pay private mortgage insurance (PMI). If you have less than 20 percent of equity in your home, making extra payments will build more equity sooner, allowing you to cancel your PMI. And eliminating PMI will reduce your monthly payments.
But for some people, paying your mortgage off early can hurt you more than help you. Here are reasons to forego pre-paying your mortgage:
- Your mortgage contract includes prepayment penalties.
- You have other high-cost debts. Credit card interest rates are often more than twice that of most home mortgages. Any extra cash should go toward paying off the balance of those first.
- You want more money in your pocket now.
- You are in a high tax bracket and this additional deduction lowers your income tax bracket as well as your taxes.
- You want to put money into another investment such as the stock market or real estate.
Some of the benefits of Reverse Mortgages include:
• Borrower(s) maintain title and ownership of their home
• Tax-free proceeds are paid as a lump sum, monthly payment, line of credit or combination – and usually do not affect Social Security Retirement Benefits or Medicare
• Generate additional monthly income
• Can be used to create a cash reserve for emergencies or special needs
• Proceeds can be used for estate planning and wealth management
• Can allow a senior to purchase a new home with no mortgage
• Peace of mind: payments to borrower under FHA insured reverse mortgages are protected by that insurance
Thirty-Year Fixed Rate Mortgage
The traditional 30-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.
A USDA Guaranteed Loan is a government insured 100% purchase loan. These loans are only offered in rural areas and have county loan amount limits, as well as income limitations. Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities.
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.