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Mortgage Types

A wide choice of home loans and financing options are available. Some choices are yours to make. Others are based on your specific circumstances.

Conventional - This mortgage is a contract between the lender and the borrower, at the lender's risk. The borrower's property is security (which means the lender can take your home for non-payment of the mortgage). This mortgage is not insured by any federally-insured program. However, it may be insured with a private mortgage insurance company. Conventional mortgages usually require larger downpayments than FHA or VA loans.

FHA (Federal Housing Administration) - The FHA will insure the loan for the lender against loss in case the buyer cannot meet payments. It requires the buyer to carry mortgage insurance through FHA. FHA loans are available with as little as 3% downpayment.

VA (Veterans' Administration) - This federal agency will guarantee the mortgages offered to qualified Armed Forces, active military personnel, veterans or their widows, by private lenders. In some cases, one can buy a home on a VA loan with no downpayment.

Jumbo - Some lenders will work out special terms for properties of very high value that fall outside typical lending standards.

Adjustable rate mortgage(ARM) - The interest on an ARM may vary up or down at fixed intervals. The changes are tied to a financial index such as one-year Treasury notes. The ARM often offers a low beginning interest rate as a "teaser." However, this rate will go up after a certain time. If interest rates are low, an ARM may be a good option. This is especially true if its cap (the highest interest you may be charged) is not more than a few points higher than the current fixed rate. ARMs are of special interest to buyers who know their income will rise in the future, or who don't plan to own the home for many years.

If you are considering an ARM, be sure you know:
1. What is the adjustment period (the time between interest rate changes)?
2. What index is used to determine interest rate?
Make sure it is not too volatile (fast-changing).
3. Does the introductory rate differ from the normal rate?
4. What is the margin?
(the margin is the percentage added to the index rate each time your loan is adjusted)
5. What is the period adjustment cap?
6. What is the lifetime adjustment cap?

Balloon Mortgage - These mortgages are offered for short terms - usually 5 or 7 years. Payments are based on what you would pay for a 30-year loan. They have low monthly payments with a final, large payment due at the end of the term. The low early payments may make it easier to get started in a new home, but you must be sure that you will be able to make the final balloon payment. At the end of their term, some balloon mortgages offer the option of extending the same mortgage for the remainder of the 30-year period. Payments are based on rates at that time.

Fixed Rate Mortgage - The interest rate on this agreement stays the same for as long as you hold your mortgage, no matter how interest rates change in the financial markets. With this type of mortgage, you know exactly how much you will pay in principal and interest on your home each month. (Remember, taxes and insurance on your home may change from year to year.)