Types of Mortgages

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A Fixed Rate Mortgage has a fixed interest rate.  It is usually fixed for the term of the loan, however, it is possible that it is fixed for a few years and then adjusted for the balance of the term.  A Fully Amortized Fixed-rate Mortgage requires regular payments on both principal and interest to pay the loan off by the end of the term.

 

An Adjustable Rate Mortgage (ARM) has an adjustable interest rate.  Interest rates are adjusted periodically, usually each year, and the adjustment is based on a specified index such as one-year treasury bills.  ARMs usually have an annual cap and a lifetime cap.  For example, if an ARM has a 2% annual cap and a 6% lifetime cap then the interest could not go up more than 2% per year or 6% over the lifetime of the loan regardless of the behavior of the index.  It is possible that the interest rate may decrease if the specified index decreases.

 

Adjustable rates vary according to an established index such as:

 

The rate on a 6 month treasury bill
The average cost of funds of FDIC-insured institutions
Rates are generally adjusted every year or 2

 

A Buy-down is payment of interest in advance of the loan in exchange for a lower interest rate.  A builder or developer may pay a percentage of the loan to reduce the interest rate to the buyer.  This allows more buyers to qualify and allows the builder to advertise an interest rate that is lower than the prevailing rate in the area.

 

A Chattel Mortgage is a mortgage secured by personal property.

 

A Package Mortgage is secured by a combination of real and personal property.

 

A Blanket Mortgage secures multiple properties.  A blanket mortgage may secure several lots of a builder.  As the builder sells the houses he builds, the mortgage holder releases the sold property from the mortgage for an agreed-upon amount from the proceeds.

 

A Purchase Money Mortgage is a mortgage or note taken back by the seller of the house.

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