In addition to the traditional fixed rate mortgage and the adjustable rate mortgage we all know about, there are some other types of mortgage instruments that are not so well known. This article details a few of those less-than-traditional mortgage methods.
Jumbo mortgage: A jumbo is nearly always considered a non-conforming loan because it exceeds the loan limit set by Fannie Mae and Freddie Mac. These are the two publicly chartered corporations that buy mortgage loans from lenders. They do this to make sure that mortgage loan money is available at all times around the nation. You should know that the single-family limit benchmark changes yearly and if you need to borrow more than that amount, you will need a jumbo mortgage. A jumbo loan usually has a higher interest rate than traditional loans.
The advantage of a jumbo mortgage is it allows you to buy a more expensive house. The disadvantage is that you will normally pay a higher interest rate.
Two-step Mortgage: These are some mortgages that use certain elements of both the fixed rate and the adjustable-rate mortgage. They might be called 2/28, 5/25 or 7/23. A two-step mortgage allows for a fixed rate and payment for an initial period, followed by one interest rate adjustment, then a fixed rate and payment for the remainder of the loan term. For example, a 5/25 has an initial fixed rate period of 5 years, then an adjustment to the rate, and then 25 years of adjusted payments.
Balloon Mortgage: A balloon mortgage is right for some people, but a bad idea for most. Home buyers in a balloon mortgage will see lower rates and payments for a specific period of time, which can be anywhere from 3 years to 10 years. At the end of that time, however, the home owner has to pay off the principal balance in one lump sum. In some cases, the mortgage may be changed to either a fixed-rate or adjustable-rate loan, but in other cases, it cannot. A balloon mortgage is most often used for those who know that they will not be in the home for long, and plans for selling it later on are somewhat firm.
Assumable Mortgage: Assumable mortgages do not happen often. An assumable loan is usually conducted with the seller and they should be approached with caution. Because they can be tricky, you should always use the services of a good attorney before getting into an assumable mortgage.
The same is true for another type of mortgage known as seller financing. With this type of loan, you pay the seller directly instead of to a bank. The property is often used as the security for the loan.
Construction Mortgages: Construction mortgages are used when building a new home is a key issue. These types of loans typically use a two-step borrowing system. The home owner may pay higher interest rates during the construction phase. Then the home owner may go through a second closing at which time the loan usually converts to a more traditional, long-term fixed-rate loan.
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