Mortgage Glossary - Part Four

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?

No Doc or Low Doc Mortgages, aka "Liar Loans"

This refers to the mortgage application, not to the mortgage itself. Business owners, people living off investments, salesmen and others whose income is variable might use low or limited documentation mortgages.

Very wealthy borrowers or those who want substantial financial privacy will sometimes use the no doc option.

In either case, in spite of their names some documentation is required. The lender will accept nothing less than excellent credit and even then you will pay more for the privilege.

This type of application was used to push a lot of junk mortgages through the system, almost causing a worldwide banking collapse.

No Money Down Mortgages

These come in two flavors: FHA type loans that allow low or moderate income borrowers to buy a house with little or nothing down and the 80-20 plans, where wealthier borrowers with little money saved up finance 100% of the purchase price.

Under the 80-20 plan a first and second mortgage are issued simultaneously. The borrower avoids having to buy mortgage insurance. The two loans are designed to cost less than an 80% loan plus the insurance, otherwise they make no sense.

If the borrower puts some money down, you will see the mortgage referred to as 80-10-10 (the last digits will be the percent of down payment) or some similar number.

It is mostly used by borrowers who haven?t saved enough for a down payment or by those who have the money, but would rather use it for other purposes.

Mortgage Refinancing

This technically means getting a new mortgage at different, hopefully better terms. A lot of people use it interchangeably with obtaining a second mortgage or line of credit; in other words tapping into the equity of their house.

Second Mortgages

Secondary financing obtained by a borrower. They can be fixed in amount or take the form of a Home Equity Line of Credit, which is simply a revolving credit line secured by a house.

Homeowners use these forms of financing to consolidate bills, do home renovations, put their kids through college, etc. They are tapping into the equity they have in their house to use for other things.

This is not necessarily a good idea. You must take firm control of your finances when you start doing this or you risk either losing your house or having to raise cash to pay the mortgages off when you sell.

If done properly, you can pay off your debt at a lower, tax deductible rate and invest your savings.

A second mortgage usually carries a fixed interest rate and term. A HELOC carries a variable interest rate and the line of credit can usually be accessed for the first ten years, at which point it is converted into a standard variable interest rate mortgage.

VA (Veteran's Administration) Mortgages

The VA provides mortgage guarantees to active duty and ex-servicemen who meet certain eligibility requirements. (To read the requirements click here.)

Like with FHA loans, the government guarantee makes it easier for low and moderate income veterans and active duty service personnel to obtain mortgages.

The current VA guarantee is $89,912. It is raised periodically.

125% Mortgages

If you want to bet house prices will rise, some lenders will lend you up to 125% of the value of your house. If you?re right, you?re okay. Otherwise be prepared to have your checkbook available when you sell your house.

You are unlikely to find these offered anymore and you would be very foolish to take one out in this financial environment.

I?m sure that there are other financing options available that I haven?t covered and don?t even know about. But most of the main financing types are covered here. One thing that has become clear over the last year, as the housing bubble has burst in certain areas of the country is that using a lot of the fancier types of financing has led many people to suffer loses they can ill afford. The usual excuse is that they did not understand the terms of their mortgage.

Some of these mortgage vehicles are a little complex, but should be understandable by most people. I think what really happens is that people sign whatever papers are placed in front of them without reading or understanding what they are doing.

No matter what kind of mortgage you are getting, make sure you know what all the terms and conditions are. If you can't understand them, hire someone to explain them to you. Don't sign credit agreements that you don't fully comprehend.

Please visit the first three parts of the Mortgage Glossary for more information.

Mortgage Glossary - Part One

Mortgage Glossary- Part Two

Mortgage Glossary - Part Three

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