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When talking to a loan officer, you will normally hear about the traditional types of loans. In this market you might only hear about FHA loans because they are becoming so popular and universal.

However, a good loan officer should be able to give you additional financing options to help you make the best decision for your specific needs, wants and goals.

Here is a list of the most common financing techniques:

• Straight Loan
• Interest Only Mortgage
• Balloon Payment Loan
• Amortized Loan
• Adjustable Rate Mortgage
• Growing Equity Mortgage
• Reverse Annuity Mortgage
  

Straight Loan (aka Term Loan)

With a straight loan, the borrower makes periodic payments on the interest until the end of the term. At the end of the term, the borrow then pays the principal (loan) amount in full.

A straight loan used to be the only type of loan available. However nowadays this type of loan is most commonly seen in home improvement loans.

Interest-Only Mortgage

There are a variety of interest only mortgages available. The main form is a mortgage that requires the buyer to make only interest payments for a stated period of time, with the full amount due at the end of the term.

It is common to see the homeowner refinance at the end of the term into a more normal (amortized) loan. In some instances, the loans will do interest only for five years, and then switch to a amortized loan for the duration of the loan.

This type of loan can be a great way to expand your buying power while reducing your initial payments. Especially if you expect an increase in income in the near future. But beware, if your home value decreases you may not be able to refinance into a more traditional or favorable loan.

Balloon Payment Loan

A balloon payment loan allows you to make smaller payments than normal for a period of time. At the end of the period (term) the total loan amount with interest will be due.

This is an uncommon form of loan for most home buyers. However it can be a good way to leverage cash flow if necessary.

Amortized Loans

With an amortized loan, payments are drawn out for a period of time, usually 30 years. Each monthly mortgage payment goes toward reducing the balance until it is slowly paid off.

Most people don’t realize an amortized loan focuses on paying off the interest before paying off the principal loan amount. For about the first 20 years a larger portion of the mortgage payment goes towards paying off the interest owed on the loan. After the 20 year mark the mortgage payment starts focusing on paying off the loan balance.

Very common and sound advice is to make one additional mortgage payment per year. The additional payment will go directly towards your principal loan amount and will save you a lot of money in interest payments.

Adjustable Rate Mortgage

An adjustable rate mortgage starts the buyer at one interest rate. From there, the rate can go up or down depending on the market.

Each loan will stipulate a different amount the interest rate can increase or decrease each year. In the details of the loan you will also find a limit on how high the mortgage payment grow to become. It is very important to understand the details of these loans.

Adjustable rate mortgages are often considered the reason for the large amount of foreclosures in today’s market. Essentially, homeowners bought their home at a low rate and a comfortable payment. When the industry started to slow down, their rates began to climb. Before the homeowners knew it, the mortgage payments became too much to afford.

Growing Equity Mortgage (aka Rapid Payoff Mortgage)

A growing equity mortgage is obtained at a fixed interest rate. However the amount owed increases each payment or as predetermined during the loan process. This allows the home buyer to pay off the home quicker and save money by not paying as much in interest.

Growing Equity mortgages are not very common. Instead home buyers wanting to pay off their mortgage quicker should make one additional mortgage payment per year. The additional payment will not be used to pay for interest, it will go directly to the loan amount.

Be careful and take the time to understand your mortgage before paying it off too quickly. Rapid payoffs can trigger prepayment penalties or increases in mortgage rates.

Reverse Annuity Mortgage

This is becoming one of the most popular types of mortgages. However it mainly applies to current homeowners looking for some cash flow during their retirement age.

With a reverse annuity mortgage, the homeowner gives the equity in their home to a lender. Based on the terms of the mortgage, the lender will then pay the homeowner a monthly, annual or lump sum amount until the equity is gone or until the homeowner passes away.

During the term of the loan the homeowner is being charged an interest rate (just like any other mortgage). When the homeowner(s) passes away the home is sold to repay the loan.

In some instances the mortgage company will guarantee a set amount of payments to the homeowner for the rest of his or her life, regardless of the home’s value. This is a very attractive offer as it guarantees income and peace of mind for the remainder of the homeowner’s life. Keep in mind, a business needs to make money and they typically don’t bet against themselves.

Its often recommended to run the decision by any children that might have an interest in owning the home for sentimental reasons. Also run all these details by a lawyer to make sure you are getting a good value and the decision is logical. It can be very easy to give the lender too much value in the event the homeowner passes away earlier than expect.

Contact Marcus with Flinsk Real Estate with any questions.