Types Of Mortgages

Types Of Mortgages

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.