|
Type |
Description |
Considerations |
|
Fixed Rate Mortgage |
Fixed interest rate,
usually long-term; equal monthly payments of principal and interest
until debt is paid in full. |
Offers stability
and long-term tax advantages. Interest rates may be higher than
other types of financing. New fixed rates are rarely assumable. |
|
Fifteen-Year Mortgage |
Fixed interest rate.
Requires down payment or monthly payments higher than 30 year
loan. Loan is fully repaid in 15 years. |
Frequently offered
at slightly reduced interest rate. Offers faster accumulation
of equity than traditional fixed rate mortgage, but has higher
monthly payments. Involves paying less interest, but this may
result in smaller tax deductions. |
|
Adjustable Mortgage |
Interest rate changes
over the life of the loan, resulting in possible changes in your
monthly payments, loan term and/or principal. Some plans have
interest rate caps. |
Starting interest
rate is slightly below market, but payments can increase sharply
and frequently if index increases. Payment caps prevent wide
fluctuations in payments but may cause negative amortization.
Rate caps limit total amount debt can expand. |
|
Renegotiable Rate
Mortgage |
Interest rate and
monthly payments are constant for several years; possible change
thereafter. Long-term mortgage. |
Less frequent changes
in interest rate (compared to Adjustable Mortgage) offer some
stability. |
|
Balloon Mortgage |
Monthly payments
based on fixed interest rate; usually short-term. Payments may
cover interest only with principal due in full at term end. |
Offers low montly
payments but possibly no equity until loan is fully paid. When
due, loan must be paid off or refinanced. Refinancing poses high
risk if rates climb. |
|
Graduated Payment
Mortgage |
Lower monthly payments
rise gradually (usually over 5-10 years), then level off for
duration of term. With adjustable interest rate, additional payment
changes possible if index changes. |
Easier to qualify
for. Buyer's income must be able to keep pace with scheduled
payment increases. With an adjustable rate, payment increases
beyond the graduated payments can result in additional negative
amortization. |
|
Shared Appreciation
Mortgage |
Below-market interest
rate and lower monthly payments, in exchange for a share of profits
when property is sold or on a specified date. Many variations. |
If home appreciates
greatly total cost of loan jumps. If home fails to appreciate
projected increase n value may still be due, requiring refinancing
at possible higher rates. |
|
Assumable Mortgage |
Buyer takes over
seller's original, below-market rate mortgage. |
Lowers monthly payments.
May be prohibited if "due on sale" clause is in original
mortgage. Not permitted on most new fixed rate mortgages. |
|
Seller Take Back |
Seller provides
all or part of financing with a first or second mortgage. |
May offer a below
market interest rate; may have a balloon payment requiring full
payment in a few years or refinancing at market rates, which
could sharply increase debt. |
|
Wraparound |
Seller keeps original
low rate mortgage. Buyer makes payments to seller who forwards
a portion to the lender holding the original mortgage. Offers
lower effective interest rate on total transaction. |
Lender may call
in old mortgage and require higher rate. If buyer defaults, seller
must take legal action to collect debt. |
|
Growing Equity Mortgage
(rapid Payoff Mortgage) |
Fixed interest rate
but monthly payments may vary according to agreed-upon schedule
or index. |
Permits rapid payoff
of debt because payment increases reduce principal. Buyer's income
must be able to keep up with payment increases |
|
Land Contract |
Seller retains original
mortgage. No transfer of title until loan is fully paid. Equal
monthly payments based on below-market interest rate with uunpaid
principal due at loan end. |
May offer no equity
until loan is fully paid. Buyer has few protections if conflict
arises during loan. |
|
Buy-Down |
Developer (or other
party) provides an interest subsidy which lowers montly payments
during the first few years of the loan. Can have fixed or adjustable
interest rate. |
Offers a break from
higher payments during early years. Enables buyer with lower
income to qualify. With adjustable rate, mortgage payments may
jump substantially at end of subsidy. Developer may increase
selling price. |
|
Rent with Option |
Renter pays "option
fee" for right to purchase property at specified time and
agreed upon price. Rent may or may not be applied to sales price. |
Enables renter to
buy time to obtain down payment and decide whether to purchase.
Locks in price during inflationary times. Failure to take option
means loss of option fee and rental payments. |
|
Reverse Annuity
Mortgage (Equity Conversion) |
Borrower owns mortgage-free
property and needs income. Lender makes monthly payments to borrower
using property as collateral. |
Can provide homeowners
with needed cash. At end of term, borrower must have money available
to avoid selling property or refinancing. |
