Mortgage Types Many Types of Term Paper

Download this Term Paper in word format (.doc)

Note: Sample below may appear distorted but all corresponding word document files contain proper formatting

Excerpt from Term Paper:

That is, if the interest rates rise to the point that the monthly mortgage payment does not cover the interest due, any unpaid interest will be added to the loan balance, so the loan balance increases. However, one also has the option to pay the minimum monthly payment, or the fully amortized amount due.

The advantage of negatively amortizing loans is that one can control cash flow with a relatively stable payment, take advantage of low interest rates relative to the market at any given time, and pay back the money borrowed today at a depreciated value years from now because of natural inflation.

With most ARMs, the interest rate can adjust every 6 months, once a year, every 3 years, or every 5 years. The interest rate on negatively amortized loans can adjust monthly. A loan with an adjustment period of 6 months is called a 6-month ARM, with an adjustment period of 1 year is called a 1-year ARM, and so on. Most ARMs offer an initial lower interest rate than the fully indexed rate (index plus margin) during the initial period of the loan, which could range from 1 month or a year or more.

Fixed-period ARMs

With fixed-period ARMs typically result in 3-10 years of fixed payments before the initial interest rate change. At the end of the fixed period, the interest rate will adjust annually. Several types of fixed-period ARMs exist, including 30/3/1, 30/5/1, 30/7/1 and 30/10/1. These loans are typically linked to the 1-year Treasury securities index. Adjustable rate mortgages with an initial fixed period usually have a first adjustment cap. This cap limits the interest rate one pays the first time the rate is adjusted. However, first adjustment caps vary with type of loan program.

The advantage of these loans is that the interest rate is lower than for a 30-year fixed because the lender is not locked in for as long so their risk is lower and they can charge less. However, one still gets the advantage of a fixed rate for a period of time.

Two-Step Mortgage

Two-step mortgages have a fixed rate for a certain time, most often 5 or 7 years, and then interest rate changes to a current market rate. After that adjustment the mortgage maintains new fixed rate for the remaining 23 or 25 years.

Convertible ARMs

Some ARMs come with option to convert them to a fixed-rate mortgage at designated times, usually during the first 5 years on the adjustment date. The new rate is established at the current market rate for fixed-rate mortgages. The conversion is typically performed for a nominal fee and requires virtually no paperwork. The disadvantage is that the conversion interest rate is typically a little higher than the market rate at that time.

The other kind of convertible mortgage is a fixed rate loan with rate reduction option. If rates have dropped since the time of closing, it allows one under some prescribed conditions for a small conversion fee to adjust the mortgage to the current market rate. Generally, the interest rate or discount points may be a slightly higher for a convertible loan.

Graduated Payment Mortgages (GPMs)

Graduated payment mortgages have payments that start low and gradually increase at predetermined times. A lower initial payment allow one to qualify for a larger loan amount. The monthly payments will eventually be higher in order to catch up from the lower payments. In fact, the loan will be negatively amortizing during the early years of the loan. Then, the principal will be paid off at an accelerated pace through the later years.

Lenders offer different GPM payment plans, which vary in the rate of payment increases and the number of years over which the payments will increase. The greater the rate of increase or the longer the period of increase, the lower the mortgage payments in the early years.

Buydown Mortgage temporary buydown is the type of loan with an initially discounted interest rate that gradually increases to an agreed-upon fixed rate usually within the first 3 years. An initially discounted rate allows one to qualify for a greater loan amount with the same income and provides the advantage of lower initial monthly payments for the first years of the loan when extra money may be needed for items such as furnishings or home improvements. To reduce monthly payments during the first few years of a mortgage, an initial lump sum payment to the lender is made. If cash is not readily available for the buydown, the lender can pay this fee for a higher interest rate.

The lower rate may apply for the full duration of the loan or for just the first few years. A buydown may be used to qualify a borrower who would otherwise not qualify. This is because a buydown results in lower payments which are easier to qualify for. If one does not plan to stay in a house for at least 5 to 7 years, it will be reasonable to consider an adjustable rate mortgage, a balloon mortgage or a two-step mortgage (Leggett). Adjustable rate mortgages traditionally offer lower interest rates during the early years of the loan than fixed-rate loans. A two-step mortgage generally offers a lower interest rate than a 30-year mortgage for the first 5-7 years. A balloon mortgage offers lower interest rates for shorter term financing, usually 5 or 7 years. Because of a lower interest rate, it is easy to qualify for these type of mortgages. However, one should not accept the ARM unless the maximum possible monthly payment can be afforded.

In summary, there are dozens of mortgage types and each have unique advantages and disadvantages. The choice of a particular mortgage is dependent on many factors including financial status, current economy, and degree of risk one is willing to take on (Leviton). The decision to accept a particular mortgage should be made based on reliable information and thorough understanding to avoid long-term financial problems.


Dudney, D., M.O. Peterson, and T. Zorn. "Mortgage Debt: The Good News." Journal of Financial Planning. September (2004): Article 7.

Goff, D.C., and…[continue]

Cite This Term Paper:

"Mortgage Types Many Types Of" (2004, December 02) Retrieved December 11, 2016, from

"Mortgage Types Many Types Of" 02 December 2004. Web.11 December. 2016. <>

"Mortgage Types Many Types Of", 02 December 2004, Accessed.11 December. 2016,

Other Documents Pertaining To This Topic

  • Mortgage Crisis the Mortgage Meltdown and the

    Mortgage Crisis The Mortgage Meltdown and the U.S. Economy This paper reviews the subprime mortgage crisis and its effect on the U.S. economy. The subprime mortgage crisis first gained the public's attention when a steep rise in home foreclosures occurred in 2006, and then spiraled out of control in 2007. At that time the mortgage meltdown triggered a national financial crisis that went global within the year. As a result, consumer spending dropped,

  • Mortgage Fraud

    Mortgage Fraud If a rash of armed bank robberies swept across America next year, and if in these robberies criminals absconded with $30 billion dollars, one may be certain that a public panic would ensue. The banking system would likely be changed forever. If thousands of armed thugs went rampaging across the nation forcing people out of their homes, into the streets, and then destroying the properties, leaving the occupants homeless

  • Mortgage Crisis Factors Responsible for

    Even worse, the entire process of due diligence with respect to qualifying potential mortgagees carefully to avoid bad risks and of appraising property as accurately as possible dissolved by virtue of the immediate and routine transfer of mortgage instruments to third parties. Realtors began encouraging borrowers to misrepresent their financial information as well as the value of their intended property acquisitions, further inflating the so-called "housing bubble." More importantly, the

  • Mortgage Refinance

    Mortgage Refinancing There is a spurt of mortgage refinancing activity in recent times, thanks to interest rates remaining low and more or less consistent over a significant time horizon, appreciation of house prices and the easier refinancing options available in the market. This paper attempts to trace the various issues that influence the homeowner's decision to refinance. The pros and cons of 30-year mortgage vis-a-vis 15-year mortgage are discussed from different

  • Mortgage Industry Impacts on New

    Interest rates will be lowered reaching 3.4% in 2011 and borrowers won't have to begin repayments until they are making about $15,000." (Education Portal, 2007) Furthermore, the effectiveness of this bill is questioned because after 2011 interest rates will quickly climb on these loans again. The work entitled; "Student Loan Lenders Creating a New Credit Bubble" states of investors, that they are: "...clamoring to purchase bundled student loans. According to

  • Mortgage Industry Impacts on New

    Debt Consolidation Specialist: This individual, if qualified and reliable is likely to be found through referral of the school one is attending. One may also contact local government offices for referrals to a good debt consolidation specialist. Information may also be found on the Internet concerning debt consolidation services. Grants: government funding that does not have to be repaid. Scholarships: college funding that does not have to be repaid in the form

  • Mortgage Company Effectiveness of the

    The focus in the meeting between the parties to the dispute is the initiative of formulating a solution that is agreeable to both parties in lieu of their own individual desire in relation to their 'side' of the matter. Oftentimes coalitions are formed in the negotiations of a 'multi-party nature. The mortgage company will be bound by certain Federal regulations in their handling of all types of disputes that would

Read Full Term Paper
Copyright 2016 . All Rights Reserved