There are
different types of mortgage loans which are
offered by various lenders as different
products. Even if a product seems somewhat
similar between mortgage lenders, the fees and
mortgage costs associated with it may vary
from one lender to another. Some of the most
widely known products are described below:
VA Mortgage: For active and
retired Military Veterans.
FHA Mortgage: Most popular loan
type, a lower down payment required, (3.5%
required).
Conventional Mortgage:10% down
payment required.
VHDA: (Virginia Housing
Development Authority) for first time home
buyers only.
Fixed Rate Mortgage
A fixed rate mortgage is one where the
interest rate does not change for the length
of the loan. The loan is amortized over the
length of the term and the per month
mortgage payment is fixed. Note that there
may be some variations in the mortgage
payment but those may be a consequence of
the real estate taxes or other components
but not due to the loan itself.
15 year Fixed Rate Mortgage
The term for this fixed rate mortgage
loan is 15 years. In other words the
mortgage and interest has to be paid back
in 15 years. The mortgage payment per
month remains same all throughout the life
of the loan.
30 year Fixed Rate Mortgage
The term for this fixed rate mortgage
loan is 30 years i.e the mortgage and
interest has to be paid back in 30 years.
The mortgage payment per month remains
same all throughout the life of the loan.
The difference between this and the 15
year fixed rate mortgage (in addition to
the difference in the number of years) is
that the per month mortgage for 30 year
fixed is less than the per month mortgage
for 15 year fixed for the same mortgage
amount. Lenders typically offer the 15
year fixed at a somewhat lower interest
rate than the 30 year fixed.
Adjustable-Rate Mortgage
An ARM mortgage, as the name suggests has
an adjustable rate against which the
mortgage payments are calculated. As a
result your mortgage payments may go up or
down throughout the life of your loan. The
rate against which your mortgage is
calculated is based upon a published market index
which in many cases is a One-Year
treasury bond index or our favorite the Cost
Of Funds Index (COFI). The interest rate
that applies to you is the sum of such an
index and a margin which is generally
set during your loan application process.
So, for example, if the index is 7.5% and
your margin is 2.5% then your rate is 10.0%.
This rate is adjusted by your mortgage
lender at every pre-determined interval
which is known as the Adjustment Interval.
So, a One-year ARM is said to have an
Adjustment interval of once every year. In
addition to such periodic adjustments, it is
possible that the very first adjustment may
occur earlier or later than all the other
adjustments. For instance a one-year ARM
mortgage may have the very first initial
adjustment after 2 years of your taking out
the mortgage loan, followed by an adjustment
every once a year. Your initial interest
rate is determined at the begining of your
loan process and may be different than the
sum of the current index plus margin.
In addition to the Initial Interest
Rate, Index, Margin and Adjustment
Interval, your mortgage lender may also
offer an Interest rate cap and Periodic
Interest Rate cap. These upper limit
caps protect you against high interest rates
for the life of the loan which means that
your interest rate would not exceed this
cap, even if the sum of margin plus index
exceeds these limits.
Convertible to Fixed Rate ARM:
This is an optional feature offered by the
lender which enables you to convert your ARM
to a Fixed rate mortgage loan after some
time has elapsed. This option may be useful
for those who want to stabilize their
mortgage payments to a fixed amount after
some time of adjustments. The rules for
converting differ between lenders and
therefore it is important that you
understand these options as offered by your
lender.
