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Mortgage Types
Mortgage Loan Types
Mortgages are generally classified as Fixed Rate Mortgages, ARMs (Adjustable
Rate Mortgages), GPMs (Graduated Payment Mortgages), FHA/VA Mortgages and a
combination of Mortgages. Choosing the right loan may potentially save you
thousands of dollars during your ownership of the property.
Fixed Rate Loans or Mortgages
Plan to stay in your home for a few years and prefer the certainty of a fixed
rate and monthly payment? Consider a fixed rate loan with your choice of terms.
The most common terms are 15 and 30 years. There are also some 5, 10, 20 or 25
year loans. Given the current low fixed rate mortgage range from 4-6% (depending
on the terms), it may be a good idea to get a fixed rate loan if you plan to
stay in the new home for 5+ years.
Adjustable Rate Mortgages (ARMs)
Prefer a lower monthly payment now? Or want to buy a more expensive home NOW
than you could afford under a fixed rate loan? An ARM may be the right choice if
you have greater earning power in the future than now.
With an adjustable rate mortgage, lock-in your initial interest rate for a set
period of time (your choice, one year or 3 years, 5 years or even 7 years, for
example). Then, your rate is subject to change, based on interest rates in
general at that time.
For example, with a 1 year ARM, your interest rate is subject to change once a
year, on the anniversary date of your mortgage. With a 3 year ARM, your rate
might change once every three years. The change is calculated based on an index
(LIBOR, TB,COF, etc.) plus a margin of 1.5% - 3%, depending on the loan programs
and lender. Terms you need to familiarize your self are: initial rate, life cap,
annual cap, margin, index, teaser rate, negative amortization. Call Wing for a
detailed analysis of these terms.
Graduated Payment Mortgages (GPMs)
This type of mortgage has the same advantages of ARMs such as low starting
interest rate and thus low monthly payment at the beginning. Its payment and
interest rate increases over time, generally 1% or 2% annually until the maximum
rate is reached. The difference is that the interest rate is determined at the
time of origination and the increase in rate is determine fixed over time. This
is NOT an ARM. This type of mortgage is generally designed for those borrowers
to qualify for lower interest rate in the form of a buy-down, for example, a
3-2-1 buy down would enable to borrower to pay 3% lower interest rate in the 1st
year, 2% lower rate in the second year and 1% lower in the third year and level
payments beginning 4th year and thereafter.
FHA/VA Loans
Zero or Low Down Payment is required under these types of financing. These are
FHA/VA guaranteed loans made to borrowers who either chose or qualified under
the requirements of those types of financing. Each type of loan has its
advantages and disadvantages. For instance, FHA loans requires lower down
payment but there is a limit in the loan amount and thus the price of the
property is limited. A VA loan requires a certificate of eligibility – you need
to be a veteran and honorably discharged before you qualified to apply for a VA
loan. There is also a limit on the loan amount.
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