Real Estate Terminology: Loan Types, the Fifth in a Series
When it comes to real estate loans, you’ll find that there are many options. Figuring out which loan or loans are best for your new property purchase can be confusing, but we can help. Here are some types of loans you might investigate.
Conforming Loan: When a loan conforms to the guidelines of FNMA/FHLMC (Fannie Mae/Freddie Mac) in both terms that may be purchased by FNMA or FHLMC it is conforming. Loans that do not match these guidelines are non-conforming loans. If the loan does not conform due to its amount, it is a Jumbo Loan. Conforming loans may have either fixed interest rates or adjustable interest rates.
Conventional Mortgage Loan: When the loan amount is within the FNMA/FHLMC guidelines, and the federal government does not insure or guarantee the lender payment through the FHA or VA, the loan is conventional). Conventional loans may have either fixed interest rates or adjustable interest rates.
FHA Insured Loan: Loans insured by the Federal Housing Administration. Borrowers must meet specific criteria to qualify. FHA loans often require lower down payments.
VA Loan: A VA loan is a mortgage loan offered to American Military and veterans guaranteed by the U.S. Department of Veterans Affairs (VA), typically at preferred interest rates and/or low to no down payment requirements.
Reverse Annuity Mortgage or reverse mortgage is a special type of mortgage created for retirees on fixed incomes. They use the loan to generate income from the equity in their homes. They continue to live in the home but ownership reverts to the lender when the last borrow moves from the home.
Mortgage Rate Terms
Fixed-Rate Mortgage: A loan secured by real estate that has a fixed interest rate and payment amount for the term of the loan (normally 15 or 30 years) is a fixed rate mortgage.
Adjustable Rate Mortgage also called ARM or variable rate mortgage: ARMs have interest rates that can vary or adjust at pre-determined intervals. Often the original rate and payment are lower, allowing borrowers to qualify more easily. The adjustment basis is an index, often the LIBOR—which stands for The London Interbank Offered Rate, or on the prime rate—the lowest rate of interest banks offer their most credit-worthy customers.
Fully Amortizing Mortgage: A fully amortizing mortgage is a mortgage with scheduled uniform payments that will fully pay-off the loan over the term of the mortgage.
Balloon Mortgage: Balloon mortgage have short terms (3 years, for example) with fixed principal and interest payments at a reduced rate that do not fully amortize (or pay off) the loan. At the end of the term, the entire balance of the mortgage is due at the end of the term in a single payment. Balloon mortgages offer lower payments during the term, but because the lump sum is due at then end, a balloon is useful for buyers that intend to sell within the term or expect to be able to pay the remainder in full or qualify for a better loan by that time. A Super Jumbo Loan is a loan with an amount more than $1,000,000.
Graduated Payment Mortgage (GPM): A graduated payment mortgage has payments that are lower in the early years but increase on a scheduled basis until they reach a level of amortization.
Bridge Loan: When a buyer is also selling and the purchase of the new property depends on the equity in the old property, a bridge loan allows the purchase to complete before the sale is complete. Once the older property sells, the borrower must repay the bridge loan.
Construction Loan: Short-term loans to funds construction or improvements are construction loans. Typically, the construction loan is repaid with the mortgage.
Home Equity Loan: A home equity loan is a loan made against the equity in a home. The borrower may utilize some or all of the loan and pays interest only on the portion used.
Nonrecourse Note: A nonrecourse note is a type of note in which the borrower has no personal liability for payment.
Open-end Mortgage: An open-end mortgage is a mortgage that may be refinanced without rewriting the mortgage contract.
Refinancing: Refinancing are the proceeds of a new loan used to pay off an existing mortgage on the same property.
Wraparound Mortgage: A wraparound mortgage is a type of owner financing when the seller owes a mortgage on the property that is less than the selling price. The seller loans the buyer the “difference” between the selling price and the existing loan and the buyer’s payments cover both the wraparound mortgage and the existing mortgage.
Finally, let’s learn some background terminology that will help you understand the structure of loans and make their descriptions less confusing.
Fannie Mae is a nickname for FNMA — the Federal National Mortgage Association. FNMA is a privately owned corporation. It purchases FHA, VA, and conventional mortgages.
Ginnie Mae is the nickname for GNMA — the Government National Mortgage Association. It is the U.S. government agency. It purchases FHA and VA mortgages.
Freddie Mac is the nickname for FHLMC — the Federal Home Loan Mortgage Corporation. FHLMC is a corporation owned completely by the Federal Home Loan Bank System. FHLMC purchases FHA, VA, and conventional mortgages.
We can help you determine the right loan options for you, and can connect you with mortgage lenders to help you realize your home-ownership dreams, so give us a call today.