Mortgage Types and Definitions

Loan Descriptions
Below is a brief description of the many types of mortgage products available. Some are more common than others:

FHA Loans are in high demand these days. We have compiled some FHA Home Loan Guidelines and Information Categories available to help you get started:

Conforming Residential Loan
A loan in which the amount borrowed is less than or equal to $417,000. Borrower(s) must typically conform to FNMA underwriting guidelines which takes into consideration of many factors such as credit history, income, property type, loan-to-value to name a few.

Jumbo Loan
A loan in which the amount borrowed is greater than $417,000 or conforming limits at the time.

15/20/30/40/50 Year Fixed Rate Loan – Pick you term!
This type of loan has monthly payments range 180 months up to 600 months that remain the same for the entire loan period after which time the loan is paid in full. The monthly payment is based on an interest rate that does not change over the term of the loan (hence the term "fully amortized fixed rate"). The monthly payment is comprised of two components; interest and a principle reduction portion. Over time your mortgage balance declines with the application of the principle portion of your monthly payment. Typically, terms over 20 years have a slightly higher rate, but a lower the payment.

Interest Only Loan
A mortgage is "interest only" if the monthly mortgage payment does not include any repayment of principal for some period. The payment consists of interest only. During that period, the loan balance remains unchanged. For example, a 30-year fixed-rate loan of $100,000 at 8.5% interest only, the payment is .085/12 times $100,000, or $708.34. A fully amortized 30 year mortgage at the same rate provides a payment of $ 768.91 which is made up of interest and principle reduction. The payment savings is $60.57 per month, however no repayment of principal occurs on the loan during the interest only period.
.
3-2-1- Buy down Loan
This type of loan program is based on an interest rate (actual rate) that does not change over the term of the loan and has fixed monthly payments generally based on a 30 year repayment schedule. However, the monthly payments that are made during the first 36 months (three years) are calculated based on an interest rate that is less than the actual rate. The first 12 monthly payments of the loan are calculated based on an interest rate that is 3% less than the actual rate. For the second year of the loan, payments 13 through 24 are based on an interest rate that is 2% less than the actual rate of the loan. For the third year of the loan, payments 25 through 36 are based on an interest rate that is 1% less than the actual rate. After the third year, the monthly payments to be made over the remaining 27 years of the loan are based on the actual rate. This type of loan is typically used to help borrowers who are unable to qualify for a loan at current interest rates. By "buying down" the interest rate, the borrower decreases the initial monthly payments which increase the borrower's ability to qualify for the loan by lowering their debt-to-income ratio. The cost of "buying down" an interest rate for a period of time is generally determined by calculating the difference between (a) the total monthly payments that would have been made during the buy down period if the loan did not have a buy down feature and (b) the total monthly payments to be made during this same period with the buy down feature in place. The “buy down” is generally paid for at time of closing by the Lender or Seller.

B/C Credit Loan (Sub-Prime)
This type of loan is available to borrowers who have or have had credit problems such as late payments or defaulting on the repayment of loans or credit cards. Sub-prime loans are available as fixed rate or adjustable rate mortgage loans. The interest rate and/or costs associated with such loans are generally higher than loans available to borrowers who have good credit history. The better the credit history, the lower the rate, as lender the lender has less loan credit risk associated with good credit. Borrowers with excellent to good credit history tend to be classified as "A" credit. Borrowers who have a history of credit issues classified as "B", "C" or "D" credit depending on the severity of the credit issues.

No Income/No Asset Verification Loan
This type of loan is generally used by borrowers who are unable to verify their income and their assets. Again, the interest rate and/or costs for such loans are higher than normal to reflect the greater degree of credit risk involved in this type of loan. Lenders typically offset this credit risk by reducing the loan-to-value and requiring the borrowers to have excellent credit history.

Government Loans
This type of loan is guaranteed by a federal agency such as the Veterans Administration or the Federal Housing Administration or by a State agency such as a State housing authority. These loans, however, contain income, purchase price or other eligibility requirements.

Construction Loan
A construction loan is used to finance the construction of a home. It may include the purchase of the land upon where the home is to be built. Unlike a standard mortgage loan, where the entire amount of the loan is disbursed to the borrower at the time the loan transaction is consummated, a construction loan involves a series of disbursements that are linked to a construction schedule. Construction loans may be either a fixed interest rate or variable interest rate during the disbursement period. Most construction loans automatically convert to a standard mortgage (referred to as "permanent" financing) once construction has been completed.

6 Month Adjustable Rate Mortgage (ARM)
A variable rate mortgage has monthly payments that are typically based on a 30 year repayment schedule however the interest rate and therefore the monthly payments, may change every 6 months (this is referred to as the "adjustment period"). The new rate is based upon fluctuations in an index (typically the One Year Treasury Security, LIBOR, etc.) and is calculated by adding a specified amount to the index. The amount added to the index is called the "margin" (typically 2.50% - 3.00%). For example, if the index equals 5.0% at the time of adjustment and the margin equals 2.75%, the new interest rate would be 7.75%. However, this type of loan program usually has limits on how much the interest rate can change (either up or down) at each adjustment date, compared with the interest rate being charged before the new adjustment is made. Typically, this limit is 1% and is referred to as an "adjustment cap". There is also a limit how much the interest rate can change (either up or down) from the initial interest rate over the entire life of the loan (typically 6%) also known as a "lifetime cap". The monthly payment changes, as needed, at each adjustment period, to reflect the adjusted rate.

1 Year Adjustable Rate Mortgage (ARM)
A 1 year ARM mortgage is similar to the 6 month ARM except the adjustment period is every 12 months (one year) as opposed to every 6 months. In addition, the adjustment cap on a 1 year ARM is typically 2% as opposed to 1%. The lifetime cap is typically 6%. The index is typically the One Year Treasury Security or LIBOR index and the margin is typically 2.50% - 3.00%.

3/1, 5/1 and 7/1 Adjustable Rate Mortgage (ARM)
These types of ARM loans have monthly payments that are typically based on a 30 year repayment schedule and the interest rate remains fixed for the first 36 months (3/1) or 60 months (5/1) or 84 months (7/1). After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). This is referred to as the "adjustment period". The new rate is based upon fluctuations in an index (typically the One Year Treasury Security or LIBOR) and is calculated by adding a specified amount to the index. The amount that is added to the index is called the "margin" (typically 2.50% - 3.00%). For example, if the index equals 5.0% at the time of adjustment and the margin equals 2.75%, the new interest rate would be 7.75%. However, this type of loan program usually has limits on how much the interest rate can change (either up or down) at each adjustment date, compared with the interest rate being charged before the new adjustment is made. Typically, this limit is 2% and is referred to as an "adjustment cap". There is also a limit as to how much the interest rate can change (either up or down) from the initial interest rate over the entire life of the loan (typically 6%) and this is referred to as a "lifetime cap". The monthly payment changes, as needed, at each adjustment period, to reflect the adjusted rate.




Financial Services Unlimited, Inc.
Client Services: 800-238-9202
11950 SW 2nd St. Suite 300
Beaverton, OR 97005
503-626-8910 - Fax


Home | About Us | Apply Online | Loan Products | Mortgage Types | Home Loan Calculator | FAQ | Contact Us




Contact us for more info