Mortgage Glossary - Part Three

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?

Fixed Rate Mortgages

Fixed rate mortgages have interest rates set for the term of the mortgage, which can be anywhere between 5 to 30 years.

Although they can be interest only or have a balloon, they usually are conventionally amortized mortgages.

At times like now, when rates are low, most homeowners want to lock in the low fixed rates. They are popular when rates are falling, not so popular when they?re high or going up.

This type mortgage is a very good idea if you're planning to live in your house for a while.

Home Equity Line of Credit

A revolving credit line secured by your home. Because it is a mortgage, it carries a lower rate than other forms of credit and the interest is tax deductible.

It differs from a second mortgage in that it is not for a fixed term or amount and can be kept in effect as long as you own your home. However, most banks only let you drawn against the line of credit for a fixed period, say the first 10 or 15 years.

The HELOC is then converted into a conventional second mortgage although often with variable interest rates.

This is used most frequently for debt consolidation and can be useful if you rip up your credit cards and use the money you save on interest to invest.

Interest Only Mortgages

This is just what it says. You only pay interest, the principal is never reduced.

This is the grand daddy of all balloon mortgages and you taking a big risk that your house depreciates in value rather than the other way around.

You could very well have to come up with extra cash at closing.

The payments are much lower than on a normally amortized mortgage and if you have the discipline, it can be a useful financial planning tool.

The interest only period is now generally limited to the first 7 to 15 years of the loan. Then you are left with a conventional mortgage, but with a shorter pay back period, which can mean a substantial jump in payments.

This only makes sense if you invest the difference in the interest only period.

Of course if you can be certain that you will move before the period is up and that the house will appreciate in value, this could be a good deal.

Jumbo Mortgages

Mortgage loans over $322,700 (the limit is periodically raised). Otherwise, the mortgage can be fixed or variable, balloon, etc.

Rates are usually a little higher than for smaller loans.

Limited Payment Mortgages

With this type of mortgage you are not paying any principal and only a portion of the interest due. The unpaid interest is added to the principal.

Lenders will not allow this to go on indefinitely. You might be allowed to add 30% or so to principal.

This might be a good idea for someone with seasonal or variable income. However, it takes a lot of discipline not to create negative equity in your home.

This type of loan, especially those carrying variable rates is causing many people to sell their homes at a loss right now, since they now have negative equity in their homes, the payments are more than they can afford and housing prices have dropped.

The usual explanation for this predicament is that the borrowers did not understand the terms of their mortgages. It is of utmost importance to read and understand your mortgage documents - or pay someone to interpert them for you - before you sign them.

Mortgage Accelerator Loans

This is a hybrid product that has been in use for years in the United Kingdom and Australia. It is relatively new to the US and has limited availability here.

Instead of a standard first mortgage, that has some sort of amortization schedule, the mortgage accelerator is a home equity line of credit that holds the first lien on your home.

The idea is that you deposit your entire paycheck into the HELOC account. All your normal expenses are paid from this account and whatever money is left goes towards reducing your mortgage balance. Also money on deposit earns interest that also goes to reduce your principal.

If you need money, it's already sitting there in your HELOC to be drawn on as needed.

This only makes sense if you make more money than you spend. In that case you can see a rapid repayment of the mortgage with huge interest savings. Otherwise, it makes little sense, especially since the HELOC carries higher rates than most fixed mortgages and converts to a fixed mortgage with variable interest rates after 10 years.

Here are links to the rest of this article:

Mortgage Glossary- Part One

Mortgage Glossary - Part Two

Mortgage Glossary - Part Four

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