Types of Mortgage Loans and Definitions

The following is provided as general overview. Consult with your lender or specific entities for details and the options each provide.  

30-year Fixed Rate Mortgage

The traditional 30-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, then adjustable-rate loans are usually cheaper.

15-year Fixed Rate Mortgage

The 15-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. This loan is fully amortized over a 15-year period and features constant monthly payments. It offers all the advantages of the 30-year loan, but generally a lower interest rate. The advantage is paying off your loan much quicker and paying less interest. The disadvantage is a higher monthly payment.

Balloon Mortgage

A mortgage with level monthly payments that amortizes over a stated term but also requires that a lump sum payment be paid at the end of an earlier specified term.   For example:  5 year balloon payment requires paying the loan off in 5 years or refinancing.

Bridge Loan

A second trust that is collateralized by the borrower’s present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as “swing loan.”  A Bridge loan requires qualify for the total amount of payments and having the necessary equity.

2/1 Buy Down Mortgage

The 2/1 Buy-Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long-term rates. However, keeping the loan in place even for three full years or more will keep the average interest rate in line with the original market conditions.

Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)

These increasingly popular ARMS—also called 3/1, 5/1 or 7/1—can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable-rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.

Adjustable Rate Mortgages (ARM)

When it comes to ARMs there’s a basic rule to remember…the longer you ask the lender to charge you a specific rate, the more expensive the loan.

Interest-only loan

A loan on which one pays periodic interest payments without any reduction in principal,and the entire principal balance is due and payable upon maturity of the note.

Negative Amortization (Neg. Am) Loan

This is a deferred-interest loan which is very powerful — and the most misunderstood mortgage program because of its many options. Basically, the lender allows the borrower to make monthly payments that are less than the accruing interest. Therefore, if the borrower chooses to make the minimum monthly payment, the loan balance will increase by the amount of interest not paid on the loan. The power of this loan lies in the borrower’s ability to choose between making the full loan payment, or the minimum payment, or any amount in between. If a borrower’s income varies throughout the year (due to commissions, bonuses, etc.), the borrower can make a lower payment during the “lean times”, and then make higher payments when funds are readily available.

Reverse mortgage.

A reverse mortgage is a loan available to a homeowner 62 or older who may be eligible to borrow against the equity in his or her home. Generally with a reverse mortgage, you receive money from a lender while you stay in your home. You don’t have to pay the money back for as long as you live there and keep the property in good repair, but the loan must be repaid when you die, sell your home, or move to a different primary residence. The amount you can borrow depends on your age, your home’s value, your equity in it, and current interest rates. You can access the money as a lump sum, a line of credit, or a combination of these methods.

“Wrap Around” Mortgage

A mortgage that includes the remaining balance on an existing first mortgage plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the “Wrap Around” mortgagee, who then forwards the payments on the first mortgage to the first mortgagee. These mortgages may not be allowed by the first mortgage holder, and if discovered, could be subject to a demand for full payment.

Fannie Mae
A congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds. [website]
FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage. [website]
WCDA

Wyoming Community Development Authority has provided programs to promote home ownership by offering below-market interest rate loans to first-time homebuyers and down-payment assistance loan programs. [website]

Freddie Mac

A stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing.  [website]

Rural Development

[website]
Annual ARM

This loan has a rate that is recalculated once a year.

Monthly ARM

With this loan, the interest rate is recalculated every month. Compared to other options, the rate is usually lower on this ARM because the lender is only committing to a rate for a month at a time, so his vulnerability is significantly reduced.