Mortgage Loan Programs

The mortgage market is much more diverse than some borrowers think.
Besides the standard fixed-rate and adjustable-rate mortgages, there are other types of mortgages and ways to finance a home.

Two-step mortgages
These are mortgages that combine elements of fixed and adjustable-rate mortgages. They go by confusing names such as 2/28, 5/25 or 7/23. A two-step mortgage features a fixed rate and payment for an initial period, followed by one adjustment, then a fixed rate and payment for the remainder of the loan term. A 7/23, for example, has an initial fixed period of seven years, an adjustment, and then 23 more years of payments following the adjustment.

     Pro: Opportunity for damaged-credit borrowers to buy homes and to establish better credit.
     Con: If your credit does not improve, you could be stuck in a high-rate loan for much

             longer than two or three years.

Biweekly mortgage
This is a fixed-rate mortgage in which payments are made every other week, instead of monthly. Typically, it is a method used to shorten the life of a 30-year mortgage. Here's how it works: You take your monthly payment amount, divide it by two, and then pay that amount every two weeks. That means you will be paying 26 "half-payments" a year -- the equivalent of 13 monthly payments, with the 13th monthly payment applied entirely to the principal balance. This simple device has a dramatic impact on the length of the loan -- a 30-year loan can be paid off in about 23 years through this method. The only tricky part of changing to a biweekly mortgage is in making sure your lender accepts your payments and correctly credits the extra portion to principal.



     Pro: Good budgeting tool for people paid biweekly.
     Con: Less flexibility if an unforeseen financial problem arises because payments

             must be made so close together.

Balloon mortgage
With these, borrowers get lower rates and payments for a specific period of time, which usually is anywhere from three years to 10 years. At that point, a borrower has to pay off the principal balance in a lump sum. Under certain conditions, the mortgages can be converted to fixed-rate or adjustable-rate loans. Many borrowers either sell their homes before they get to their due dates or end up refinancing their balances into new mortgages.

     Pro: Save on mortgage costs initially -- a great option if you don't plan on living in the

             home long.
     Con: Plans sometimes change. Will have to pay off or refinance balance,

             with time, effort and more closing costs.


Assumable mortgage
Assumable mortgages are relatively rare. A homeowner with an assumable loan can "hand off" the loan to a buyer instead of paying it off using proceeds from the home sale. If rates are low and you can get one, by all means do so. If rates rise, buyers will want to assume your loan (and will be willing to pay more for your house!) because it'll be much cheaper than any loan they could get from a bank or other source.

      Pro: Reduces monthly payments and saves money on closing costs.
      Con: Sellers charge more for houses, so buyers need more cash to cover

              the difference between asking price and loan balance.

Subprime mortgages
These days, even people with less-than-stellar credit can buy homes -- as long as they're willing to pay up for so-called subprime mortgages. These loans have higher rates and more onerous terms than conventional loans, but they can help bruised-credit borrowers reap the benefits of homeownership just like their more creditworthy cousins.

       Pro: Opportunity for those who can't prove income, have low credit scores,

               bankruptcies, too much credit or need a higher-than-normal loan-to-value

               ratio on property.
      Con: No consistency. Rates, fees and underwriting guidelines vary drastically.

              Borrowers need to shop more to find best rate.

Construction mortgages
These loans help people who want to build homes, rather than buy existing ones. They typically feature a two-step borrowing process. Borrowers pay higher rates for the duration of construction, during which time they draw money to pay their builders. Then, they go through a second closing at which time the loan usually converts to a traditional, long-term fixed-rate structure.

Seller financing
This is an agreement where the seller of the home provides financing to the buyer. The buyer makes monthly payments to the seller instead of the bank. The promissory note is secured by the property. This type of financing often includes an assumable mortgage.