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There are many types of mortgage loans. The two basic types of amortized loans are the
fixed rate mortgage (FRM) and adjustable rate mortgage (ARM).
In a FRM, the interest rate, and hence monthly payment, remains fixed for the life (or term)
of the loan. In the US, the term is usually for 10, 15, 20, or 30 years. In the UK the fixed
term can be as short as five years, after which the loan reverts to a variable rate (which
makes the loan an ARM).
In an ARM, the interest rate is fixed for a period of time, after which it will
periodically (annually or monthly) adjust up or down to some market index. Common indices in
the US include the Prime Rate, the LIBOR, and the Treasury Index ("T-Bill"). Other indexes
like COFI, COSI, and MTA, are also available but are less popular.
Adjustable rates transfer part of the interest rate risk from the lender to the borrower,
and thus are widely used where unpredictable interest rates make fixed rate loans difficult
to obtain. Since the risk is transferred, lenders will usually make the initial interest rate
of the ARM's note anywhere from 0.5% to 2% lower than the average 30-year fixed rate.
In most scenarios, the savings from an ARM outweigh its risks, making them an attractive
option for people who are planning to keep a mortgage for ten years or less.
A partial amortization or balloon loan is one where the amount of monthly payments due are
calculated (amortized) over a certain term, but the outstanding principal balance is due at
some point short of that term. A balloon loan can be either a Fixed or Adjustable in terms
of the Interest Rate. Many Second Trust mortgages use this feature. The most common way of
describing a balloon loan uses the terminology X due in Y, where X is the number of years
over which the loan is amortized, and Y is the year in which the principal balance is due.
Other loan types:
Blanket Loan
A blanket loan, or blanket mortgage, is a mortgage client securing several parcels of property,
frequently used by developers who have purchased a single tract of land intending to subdivide
into individual parcels. The developer normal requires a "partial release" clause so that
individual parcels can be released from the blanket mortgage as they are sold.
Bridge Loan
A bridge loan is a type of short-term loan in the financial industry. Bridge loans are typically
taken out for a period of 2 weeks to 3 years in order to finance other projects. Uses for bridge
loans include real estate purchases, retrieving real estate from foreclosure and business loans
for operating capital.
A Bridge Loan is a temporary Short Term loan taken for a pending liability for some time and it
then gets converted into Bank Overdraft.
Explanation: A time period is specified wherein the bureaucratic procedures of Bank OD are completed
and by that time the Bridge Loan is converted into Bank OD. It is a Short-term loan and less
bureaucratic.
Equity Loan
An equity loan is a mortgage placed on real estate in exchange for cash to the borrower. For
example, if a person owns a home worth $100,000, but does not currently have a lien on it, they
may take an equity loan at 80% loan to value (LVR) or $80,000 in cash in exchange for a lien on
title placed by the lender of the equity loan.
Many lending institutions require the borrower to repay only an interest component of the loan
each month (calculated daily, and compounded to the loan once each month). The borrower can apply
any surplus funds to the outstanding loan principal at any time, reducing the amount of interest
calculated from that day onwards. Some loan products also allow the possibility to redraw cash up
to the original LVR, potentially perpetuating the life of the loan beyond the original loan term.
The rate of interest applied to equity loans is much lower than that applied to unsecured loans,
such as credit card debt.
Hard Money Loan
Hard money loans are loans in which real estate serves as the collateral asset. The lender assumes
a lien position on the property, and if the borrower cannot repay the hard money loan, the lender
may take the property and sell it to repay the loan. Higher interest rates and lower LTVs (loan-to-value
ratios) are common because the lender is not backed by a government institution (unlike mortgages
given by banks).
These loans are most commonly used as a type of bridge loan for temporary financing. As with other
collateralized loans, the size, rate, and length of a hard money loan is determined by the borrower's
equity in the asset, the volatility of the asset and marketplace, and the financial standing of the
borrower. Hard money loans are funded for business and personal use. The real estate asset may be
business or personal property, and the proceeds of hard money loans are not restricted to business use.
Package Loan
A package loan is a real estate loan used to finance the purchase of both real property and personal
property, such as in the purchase of a new home that includes carpeting, window coverings and major
appliances.
Reverse Mortgage
A reverse mortgage (known as equity withdrawal in the United Kingdom) is a type of loan used by older
consumers as a way of converting their home equity (the value of their home, minus the amount of
mortgage(s)) into a cash payment (or series of payments) while retaining ownership of their property.
To qualify for a reverse mortgage in the United States, you must be at least 62 and have paid off
all or most of your home mortgage.
Reverse mortgages allow the home owner to continue living in the home without being required to repay
the loan. In exchange, the lender receives a substantial fraction of the home's equity. In the United
States, the proceeds of the loan are tax-free, there are no minimum income requirements, and for most
reverse mortgages, the money can be used for any purpose. However, reverse mortgages also tend to be
costlier than other types of loans, and are sometimes abused by disreputable lenders.
Income is generally not considered by lenders when granting reverse mortgages, and no medical tests
or medical histories are required. The amount you can borrow depends on your age, the equity in your
home, the value of your home, and the interest rate. Reverse mortgages administered by the government
may have other requirements as well.
In the United States, you can be paid in a lump sum, in monthly advances (payments), through a line
of credit, or a combination of all three. The loan advances, which are not taxable, generally do not
affect Social Security or Medicare benefits, since they are an asset exchange (giving up part of
your home equity in exchange for cash), not income. However, you should keep in mind that reverse
mortgages tend to be more costly than traditional loans. They also use up all or some of the equity
in a home. For these reasons, it's very important to compare reverse mortgage lenders and be aware
of their requirements and risks before applying for this type of loan.
Term Loan or Interest-only Loan
An interest-only loan is a loan in which for a set term the borrower pays only the interest on the
capital; the capital remains owing. At the end of the term the borrower may renew the interest-only
mortgage, repay the capital, or (with some lenders) convert the loan to a principal and interest
payment loan at his option. It should be noted that some interest-only mortgages in Canada allow
the borrower to pay interest-only, principal and interest, or even principal and interest plus 20% extra.
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