Understanding Various Types of Mortgage Loans

Today’s market is a buyer’s market. With home prices and mortgage rates at near record lows, those wishing to purchase a home are bound to find a great real estate deal provided they take their time and proceed carefully. If you are considering buying a home, one of the first and foremost steps will be to find a mortgage loan. A good part of the reason for the decline of the housing industry was the failure of consumers to understand the terms of their mortgage loans before signing their names on the final agreement. This is why it is necessary for people to understand the fundamentals of the various mortgage options available today. Educating yourself on the differences will help you determine which loan option is best for you.

The Basics

The two basic home loan categories are fixed rate mortgages (FRM) and adjustable rate mortgages (ARM). Traditionally, FRMs have been the most popular home financing option for U.S. home buyers. FRMs account for about 70 percent of home purchases. Fixed rate mortgages are characterized, as their name implies, by their stability. The interest rate on an FRM will remain the same throughout the entire term of the loan, without regard to any changes in the state of the housing market. The borrower can thus rely on consistent, monthly payments that are put towards both the principal loan amount and the interest.

Adjustable rate mortgages became especially popular during the rise of the housing market in this past decade because they offer a low interest rate for a set period of time (such as 3, 5, or 7 years), after which they ‘adjust’ up to another rate (usually higher) and may continue to adjust until an interest rate maximum is reached. Unlike an FRM’s steady interest rates, the interest rates of an ARM are determined by specific market indexes that change with the motions of the prevailing market. While ARMs provided temporary savings and affordability to many homebuyers, they led to many financial problems after the real estate bubble burst and borrowers were unable to refinance out of their loans after their loans adjusted to a higher payment.

The intervals at which the interest rate of an adjustable rate mortgage will change are disclosed in the original loan contract. Basically, if the market index increases from one adjustment period to the next, the interest rate will increase as well, and thus too the monthly payment. By the same token, if the market rate decreases, the interest rate may decrease and the monthly payments may be lowered, depending on the loan. There are usually limits, or “caps”, established during the beginning of the mortgage loan origination process that determine how much an interest rate can change from one adjustment period to the next.

Under the two basic mortgage categories of ARM and FRM, there are a variety of loan types, some of which combine aspects of the two main mortgage types. Below are basic outlines of some of the most common loan variations.

Government Backed Mortgage Loans

The Federal Housing Administration (FHA) loan falls under the fixed rate mortgage loan category. It was specifically designed with first time home buyers in mind, especially those with middle to low incomes. Because FHA loans are guaranteed by the federal government, they can be easier to qualify for than traditional fixed rate mortgage loans. FHA loans usually require lower down payments (about 3 percent), and offer low interest rates as well. Both people looking to buy a single family home or a multi-family home have the FHA loan option available to them, provided the home will be owner occupied.

Another federally backed mortgage program are VA (Veteran’s Administration) loans. VA loans are available to those who have served in any branch of the U.S. military or to the surviving spouse of an active service member. Veterans can often obtain VA loans very easily, and this program requires little or no down payment. The main qualification for a VA loan is that applicants need to prove that they have the means to make the monthly loan payments on time.

The last government backed mortgage loan type we will touch on is the USDA Rural Development Guaranteed Housing Loan. This loan is designed for low to moderate income borrowers who wish to buy a home in an area considered as Rural Development eligible. No payment is required and the qualification process is much more lenient than in regular home loans, so that borrowers with medium to poor credit can have the means to finance their purchase.

Balloon Mortgages

Balloon mortgages are structured in a similar way as FRMs, except the loan terms only last for about five to seven years, after which the entire sum of the loan becomes due – rather than being amortized over the entire life of the loan. This is why they are referred to as balloon mortgages, because of the large final payment requirement where owners must then pay the outstanding loan either out of pocket or by refinancing their house, depending on the specifics of the loan

Option ARMs

Option ARMs differ from regular ARMs in that they do not have adjustment caps. Option ARMs have an interest rate that changes every month – borrowers have the ‘option’ to pay different amounts, such as the fully amortized payment, the interest only payment, or a negative amortization payment (when the payment is less than the interest accrued on the loan, causing the loan balance to increase slightly). Option ARMs were originally designed for borrowers with wide fluctuations in their pay, such as salespeople paid on commission – they could pay the full payment some months, and the minimum payment other months as needed. However, most borrowers in an Option ARM will pay only the minimum, which results in a loan that increases over time, often by a considerable amount.

Interest Only

For a predetermined period of time, borrowers with an interest only mortgage are allowed to pay only the interest of their loan, without paying towards the principal amount. This results in a lower mortgage payment for the duration of the interest only period, but it also means that the principal balance is not reduced during this time. Once the interest only period ends, payments naturally increase since they now include the loan principal, and in fact end up much higher since the principal now has to be paid in less time. The longer the interest only period, the higher the monthly mortgage bill will be after the adjustment.

April 16th, 2009

PRIVACY POLICY DISCLOSURE
(Protection of the Privacy of Personal Non-Public Information)

Respecting and protecting customer privacy is vital to our business. By explaining our Privacy Policy to you, we trust that you will better understand how we keep our customer information private and secure while using it to serve you better. Keeping customer information secure is a top priority, and we are disclosing our policies to help you understand how we handle the personal information about you that we collect and disclose. This notice explains how you can limit our disclosing of personal information about you. The provisions of this notice will apply to former customers as well as current customers unless we state otherwise.

The Privacy Policy explains the Following:

Protecting the Confidentiality of Customer Information:

We take our responsibility to protect the privacy and confidentiality of customer information very seriously. We maintain physical, electronic, and procedural safeguards that comply with federal standards to store and secure information about you from unauthorized access, alteration, and destruction. Our control policies, for example, authorize access to customer information only by individuals who need access to do their work.

From time to time, we enter into agreements with other companies to provide services to us or make products and services available to you. Under these agreements, the companies may receive information about you but they must safeguard this information, and they may not use it for any other purposes.

Who is Covered by the Privacy Policy:

We provide our Privacy Policy to customers when they conduct business with our company. If we change our privacy policies to permit us to share additional information we have about you, as described below, or to permit disclosures to additional types of parties, you will be notified in advance. This Privacy Policy applies to consumers who are current customers or former customers.

How We Gather Information:

As part of providing you with financial products or services, we may obtain information about you from the following sources:

Information We Share:

We may disclose information we have about you as permitted by law. We are required to or we may provide information about you to third-parties without your consent, as permitted by law, such as:

In addition, we may provide information about you to our service providers to help us process your applications or service your accounts. Our service providers may Include billing service providers, mail and telephone service companies, lenders, investors, title and escrow companies, appraisal companies, etc.

We may also provide information about you to our service providers to help us perform marketing services. This information provided to these service providers may include the categories of information described above under “How We Gather Information” limited to only that which we deem appropriate for these service providers to carry out their functions.

We do not provide non-public information about you to any company whose products and services are being marketed unless you authorize us to do so. These companies are not allowed to use this information for purposes beyond your specific authorization.

Opting Out

We also may share information about you within our corporate family of office(s). We may share all of the categories of information we gather about you, including identification information (such as your name and address), credit reports (such as your credit history), application information (such as your income or credit references), your account transactions and experiences with us (such as your payment history), and information from other third parties (such as your employment history).

By sharing this information we can better understand your financial needs. We can then send you notification of new products and special promotional offers that you may not otherwise know about. For example, if you originally obtained a mortgage loan with us, we would know that you are a homeowner and may be interested in hearing how a home equity loan may be a better option than an auto loan to finance the purchase of a new car.

You may prohibit the sharing of application and third-party credit-related information within our company or any third-party company at any time. If you would like to limit disclosures of personal information about you as described in this notice, you can do so by contacting LendSure and identifying one or more of the below privacy options.

LendSure email contact: customerservice@lendsure.com
LendSure mail contact: 11939 Rancho Bernardo Rd., Ste. 204 San Diego, CA. 92128

LendSure Financial Services, Inc., 11939 Rancho Bernardo Road, Suite 204, San Diego, CA 92128, NMLS #146969, is licensed by/under the: California Department of Corporations under the California Residential Mortgage Lending Act, License No. 413 0998; Oregon Mortgage Lender License No. ML-4884; and Washington Consumer Loan Act License No. 520-CL-51480.