Types of Mortgage Financing
- Fixed-rate mortgages offer a consistent mortgage payment because the fixed interest rate is applied to the loan amount and amortized over the selected term of the loan, which can be for 10, 15, 20 or 30 years. This results in a principal monthly payment that remains constant throughout the life of the loan. Interest on the loan is front-loaded, so payments made early in the term of the loan apply more to interest than principal. While the monthly principal amount of the loan will be constant, changes in taxes and insurance may cause your loan payment to fluctuate.
- An adjustable-rate mortgage (ARM) has a low introductory interest rate for a set term of 6 months up to 10 years. This introductory rate initially provides the borrower with a lower monthly mortgage payment. Once the introductory term is over, the interest rate adjusts based on indexes and margins (which is a percentage added to the index). Indexes, such as the London Interbank Offered Rate (LIBOR) or the U.S. Constant Maturity Treasury (CMT) are based on current economic trends, so your interest rate and mortgage payment could increase or decrease during any given adjustment period. Adjustable-rate mortgages have a floor and a cap, dictating the lowest and highest interest that can be applied to the loan.
Hybrid adjustable-rate mortgages combine features of a fixed-rate loan with that of an ARM. The initial interest rate of a hybrid ARM is fixed for a designated length of time, then fluctuates throughout the remainder of the loan. - For homeowners age 62 and older who own a primary residence, the reverse mortgage offers supplemental retirement income. Instead of the homeowner paying the lender in installments, repayment of the loan occurs when the homeowner moves, dies or no longer uses the home as a primary residence.
The HECM Saver reverse loan saves borrowers on the insurance premium portion of the loan, which previously cost 2 percent of the home's value, reports CNNMoney.com. Loan options include variable or fixed rate lump sum payments or credit lines with variable rates. Upon the sale of the primary residence, repayment of the loan balance includes an annual insurance premium charge of 1.25 percent as of Dec. 9, 2010. - Interest-only mortgages (and their spinoff---payment-option ARM) offer homeowners the choice of paying only interest on their loan for a fixed term. When the fixed term is up, the payment increases to include principal and interest on the loan. Caution should be used when considering these mortgages -- payments could skyrocket after the initial interest-only period, and payment-option ARM loans can result in negative amortization that leaves a homeowner upside-down in the house, according to the Federal Reserve Board.
