Mortgage Glossary - Part Two

The Most Common Mortgage Types and Their Uses

Bankers have come up with a whole smörgåsbord of different mortgages, trying to satisfy all the people all the time. This is a glossary of the more common terms.

When shopping for a mortgage this might help you make sense of all the different options that are available to you.

[Since the onset of the Subprime Mess, you will probably find a lot of the more exotic mortgage types are no longer offered.]

Mortgages Made Simple?

BiWeekly Mortgages

A biweekly mortgage is one where half of the normal mortgage payment is made every every two weeks. Since you are making 26 payments a year, rather than 24, you wind up paying off the interest sooner and saving considerable money.

Take the example of a $200,000, 4.5% fixed rate mortgage with a 30 year term. The normal payment would be $1013.37 a month.

The biweekly amount is $506.91. But the payoff is huge. Your loan will be paid 5 1/2 years earlier and you will save 28% or $32,639.75 interest.

You can set up your own biweekly mortgage plan with your existing mortgage, assuming there is no prepayment penalty (which usually only applies the first few years anyhow). Simply send in or have your bank debit your checking account for one half your mortgage payment every two weeks. There should be no extra costs or fees to do this.

Or you can reach a similar result by dividing your monthly payment by twelve and adding that to your payment. In this example that would come out to be an extra $84.44 a month.

The secret is that any prepayment, no matter how small will result in savings in interest and a shorter repayment period.

To calculate your own savings using this plan, click here.

Bridge Loans

Bridge loans are used in real estate transactions to cover the down payment on a new home, when the borrower has equity in his old home, but not enough cash on hand to make a downpayment or wants to use his money elsewhere.

It is generally a short term, interest only loan that is repaid when the homeowner sells his old house.

Conventional Mortgages

Most mortgages are conventional, the terms just vary. A conventional mortgage to most people is a 15 or 30 year fixed rate mortgage with at least 20% down.

I guess unconventional mortgages would be of the zero down, interest only and 125% mortgage types. Unfortunately many borrowers do not understand what they are getting themselves into with some of these mortgages and they wind up costing them dearly if things go wrong. It is easy to find yourself "underwater" (with negative equity) with these loans because shortfalls in payments are usually added to principal.

Construction Mortgages

These are really loans that carry a higher interest rate than a normal mortgage. They allow you to borrow the money to build a house and are converted into a mortgage once the house is finished.

FHA (Federal Housing Administration) Mortgages

The FHA is a branch of the Housing and Urban Development (HUD) Department. It is a depression era creation, meant to make it possible for people to buy homes at a time when banks where not granting mortgages.

The FHA insures loans up to certain set amounts, which vary with the region of the country and the type of loan. Right now the guarantees run from about $160,000 for a one family house to somewhat over $300,000 for a four family home.

This type of mortgage is designed to help low and moderate income people become home owners. It requires low, or no, down payments and has flexible lending requirements.

If the borrower defaults, the government steps in and pays the guarantee. This makes it easier for lenders to write mortgages they would otherwise refuse.

Here are links to the rest of this article:

Mortgage Glossary- Part One

Mortgage Glossary - Part Three

Mortgage Glossary - Part Four

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