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There are two major categories of loans:
Government loans - the ones that are quaranted by the Government (FHA, VA, RHS)
Traditional loans - all the rest, as discussed below.
Traditional loans are either conforming or non-conforming depending on whether certain regulations are met as determined by Fannie Mae and Freddie Mac. These two agencies issue guidelines for the maximum allowed loan amounts, income and credit history requirements, mandatory downpayments. Maximum allowed amounts are updated annually. Limits stated below are effective in most states (previous years shown for comparison):
| Loan Limits for: |
2005 |
2004 |
2003 |
2002 |
| One-family |
$359,650 |
$333,700 |
$322,700 |
$300,700 |
| Two-family |
$460,400 |
$427,150 |
$413,100 |
$384,900 |
| Three-family |
$556,500 |
$516,300 |
$499,300 |
$465,200 |
| Four-family |
$691,600 |
$641,650 |
$620,500 |
$578,150 |
Shown amounts are 1.5 times higher in Alaska, Guam and Hawaii
Loans exceeding these amounts are called Jumbo Loans. APRs for such loans are somewhat higher. Loans exceeding $650,000 are referred to as Super Jumbo.
Loans than don't satisfy other standard requirements are called B, C or D-paper. These are offered to individuals whose credit history contain records of bankruptcies, foreclosures or late payments. These are usually short-term (2-3 years) loans allowing the borrower to restore his/her credit history.
Loans also differ by amortization terms and by the methods used to determine the Annual Percentage Rate (APR or, simply, rate).
Fixed Rate Mortgages
APR is fixed for the entire amortization term of the loan. Typical terms are 30, 25, 20 and 15 years with 30-and 15-year loans being the most common.
Balloon Loans
These are short-term loans with 30-year amortization that are expected to be paid off in 3, 5 or 7 years. During this short term the borrower is making payments as in the case of a 30-year loan with fixed rate. When the said short period expires the borrower has to fully repay the rest of the loan (Balloon Payment).
Adjustable Rate Mortgages (ARMs)
Rate is not fixed. The formula below is used to calculate the current rate and monthly payments are adjusted accordingly:
New interest rate = index + margin
the result is rounded to the nearest 1/8%
For example:
LIBOR index = 3.62
margin = 2.5
inters rate = 3.62 + 2.5 = 6.12 (which produces 6.125% after rounding)
Margin remains fixed for the entire term.
Most ARMs have some set limits for both one-time and total growth of APR (cap). This protects the borrower from unexpectedly rapid growth of the required monthly payment.
Here are the most common indices:
- Constant Maturity Treasury (CMT)
- Treasury Bill (T-Bill)
- 12-Month Treasury Average (MTA)
- Certificate of Deposit Index (CODI)
- 11th District Cist of Funds Index (COFI)
- Cost of Savings Index (COSI)
- London Inter Banc Offering Rates (LIBOR)
- Prime Rate
Fixed period ARMs
This is the most common variety of ARM. APR is fixed for either 3-6 months or 1/2/3/5/7/10 years after which term it is calculated as discussed above.
Option ARMs
After the first payment (usually 1.00-2.25%) the following options are available for the borrower each month:
- Minimum payment (equal to the first payment)
- (interest only)- this also can not be less than the minimum payment
- 30-year amortization
- 15-year amortization
Minimum payment usually grows by 7.5% per year until it reaches the 30-year amortization amount.
HELOC
Secured by property (Home Equity Line of Credit). These are usually bound to the Prime Rate and are offered for the term of 10-30 years. The borrower is free to withdraw and repay any amounts within the total preset limit during the first 5-10 years and is only required to pay the finance charge on the current borrowed amount. The remaining balance is required to be paid off during the rest of the term. These loans are normally given in the form of check books or credit cards.
Types of financing
80% financing
This is the oldest one. You make a downpayment in the amount of 20% of the property cost and get the loan for the rest 80%.
97% financing
Special programs are available in to finance 97$ of the property cost. Some programs even allow to make a required 3% downpayment from the assets received as a present.
100%, 103%, 107% financing
These programs allow to now only purchase the property without any downpayment (no money down) but, in some cases, to also cover the cost of the process (closing cost) as well as of initial tax and insurance payments.
Combinational loans
This form of financing is used in cases of 0-15% downpayment to avoid the need for Mortgage Insurance (PMI). Your main mortgage is a usual 80% financing and your additional loan is for 5-20% of the total cost of the property depending on the actual downpayment you make. This smaller loan can have either fixed or adjustable rate (Home Equity Line of Credit). 80/20% combinational financing amounts to 100% financing.
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