| 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. |
