Types of Loans

Some types of loans.....

Fixed Rate Mortgage - Fixed rate loans are fully amortized loans characterized by a fixed interest rate and consistent monthly payment over the life of the loan. Fixed rate loans are typically for 15 or 30 years though they are sometimes marketed in 20 and 10 year increments.

Adjustable Rate Mortgage - An adjustable rate mortgage (also called variable rate mortgage) is a mortgage where the interest rate on the loan is periodically adjusted. The rate is based on an underlying index and adjusts as that index is changed. Consequently, payments made by the borrower change over time as the interest rate changes.

Assumed Mortgage – Mortgage where the buyer assumes all the obligations of the seller’s mortgage. These are common when the seller has a mortgage loan with a lower than market interest rate.

Balloon Mortgage - Mortgage which does not fully amortize over the term of the loan, thus leaving a balance due at maturity. This balance due is included in the final payment and is called a balloon payment because of its large size. Typically the expectation with balloon loans is that the borrower will either refinance the loan or sell the property prior to the final balloon payment.

Buydown – Mortgage financing technique where the buyer tries to obtain a lower interest rate for the first few years of the loan term. The buyer “buys” the house for a higher price than they otherwise would and the seller in turn pays a portion of the buyers mortgage loan payments. This lowers the buyers monthly payment and can lower the interest rate.

Home Equity Loan – This is a loan where a homeowner borrows against the equity value of their home. For example, 10 years ago a homeowner may have put $100,000 down on a $1,000,000 home and financed the rest. Today the home is worth $1.5M and the owner owes $600,000 on the original loan. The equity in the home is then $900,000 ($1.5M-$600k). The owner can then "pull out" the equity via a home equity loan. Typically an owner can take an equity loan for up to 100% of the equity in the home. The higher the percentage of equity, the higher the interest rate. Some lenders even offer home equity loans of 125% the equity value. Borrowers should use these loans cautiously as the rates are often exorbitant.

Foreign National Mortgage - A mortgage loan for a non-US resident is a foreign national mortgage loan. Financing is often done by US mortgage companies. The financing requirement may be more stringent. The minimum down payment is usually 20% of the purchase price (80% LTV).

Graduated Payment Mortgage Loan - GPM's, as they are commonly referred, are mortgages with a low initial monthly payment that gradually increases over a period time. They are ideal for young home owners who expect their income to grow significantly in the future.

Reverse Mortgage - This is a loan available to people over the age of 62 which can be used as a way to convert home equity into cash. In a reverse mortgage, the home owner borrows against the equity and uses the cash for retirement and living expenses. The borrower lives in the home and the loan repayment deferred until the borrower is no longer living in the home. At that time either the loan is paid off or the home is sold to pay the debt.

Interest Only Loan - Interest-only loans are loans where the borrower pays only the interest on the principal balance for a set term –typically five to ten years- at the beginning of the loan term. After the end of the interest-only period, the principal balance is then amortized for the remainder of the loan term. During the interest-only period, borrowers are essentially renting their own home as they are paying no principal down at all.

Wraparound Mortgage - Wrap-around financing is a type of seller financing that is common for TIC sales. In wrap-around TIC financing, the owner of a given building will have a mortgage loan that pre-dates the formation of a TIC. The owner then sells the building to the TIC ownership group. The seller “lends” the funds to the TIC owners who then pay back their mortgage loan directly to the seller. The seller than uses a portion of the payments he/she receives to pay the original mortgage on the building.

Negative Amortization Loan - Loan characterized by an amortization method where the borrower pays back less than the full amount of interest owed. The purpose of this feature is to make the loans more affordable due to the low monthly payments. The downside is that the shorted interest -the amount not covered by the monthly payment- is added to the principal. Thus the amount owed actually grows each month until the borrower starts paying down the principal.