All the mortgage programs offered by lenders may be classified as fixed rate loans, adjustable rate loans and loans with fixed periods followed by an adjustable period after the initial fixed rate expires.
Conventional loans may be conforming and non-conforming. Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac set forth guidelines to establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties.
Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as ‘jumbo’ loans. Because jumbo loans are not regulated by Fannie Mae and Freddie Mac, they tend to have higher interest rates. The interest rate usually fluctuates based on the performance of the economy.
Fixed Rate Mortgages
With fixed rate mortgage loans, the interest rate and your mortgage monthly do not adjust or change through the entire life of the mortgage. Fixed-rate mortgages products are available for 30, 20, 15 years and 10 years. In most cases, the lower the term the lower overall interest you pay and the lower the interest rate.
Balloon loans are short-term fixed rate loans that have a temporary fixed monthly payment schedule based upon a 30-year fully amortizing payment schedule. Upon termination of the fixed period (usually 3,5,7 and 10 years) a lump sum payment is due for the remainder of the balance.
Adjustable Rate Mortgages
Variable or adjustable loan is loan whose interest rate and monthly payment may fluctuate over the life of the loan. Periodic adjustments are based on changes in the indexd your interest rate is attached to. The index cannot change after your loan has been funded and can be found in the promissory note. The following are some of the indexes variable rate mortgages can be tied too:
- Constant Maturity Treasury (CMT)
- Treasury Bill (T-Bill)
- 12-Month Treasury Average (MTA or MAT)
- Certificate of Deposit Index (CODI)
- 11th District Cost of Funds Index (COFI)
- Cost of Savings Index (COSI)
- London Inter Bank Offering Rates (LIBOR)
- Certificates of Deposit (CD) Indexes
- Bank Prime Loan (Prime Rate)
Negatively amortizing loans
Some types of variable rate mortgages offer payment caps rather than interest rate caps, which limit the amount the monthly payment, can increase. If the payment made is less than the amount necessary to cover the full interest payment, negative amortization can occur. The difference between the minimum payment and the interest only payment is added to the principle.
With so many mortgage options available to consumers, please be sure to ask your mortgage consultant what program best fits your scenario.