Finding Your Way through the Mortgage Jungle

Choosing a mortgage loan used to be a fairly simple process because you didn't have much in the way of choices. But times have changed. Whether you're buying your own home or income-producing real estate, you need to understand what your options are. Here is a list of some of the loan products you'll want to consider:

Adjustable-rate mortgage (ARM)
With this type of loan, the interest rate changes periodically based on terms specified in advance by the lender. The initial interest rate is usually lower that that offered with a fixed-rate mortgage. At predetermined times, the interest rate will be adjusted either up or down, usually based on the changes in specified index. Most adjustable-rate mortgage programs offer the protection of a rate cap, which limits the amount the rate can be increased each year as well as over the life of the loan. Also called a variable rate mortgage.

Assumable mortgage
A mortgage that can be taken over (assumed) by the buyer when a home is sold. Whether or not the buyer must qualify for the loan depends on the original terms of the loan.

Balloon mortgage
This type of mortgage has level monthly payments that are amortized over a stated term but that provides for a lump sum payment to be due at the end of an earlier specified term. For example, with a five-year balloon mortgage, the payments would be calculated on a 30-year term but at the end of five years the remaining principal balance is due and payable in full. That final payment is known as the balloon payment.

Biweekly mortgage
Under the terms of a biweekly mortgage, payments are made every two weeks instead of the standard once a month. A biweekly mortgage amortizes much faster than a monthly payment loan. The result is typically substantial savings over the term of the loan and having the loan paid off an average of six to eight years ahead of schedule.

Blanket mortgage
This type of mortgage loan covers more than one property owned by the same borrower. If you want to finance multiple properties, a blanket loan can save time over obtaining separate loans. For example, you can use a blanket loan to cover both a primary and secondary residence. Or a builder could use a blanket loan to cover all of the lots in a subdivision.

Bridge loan
Also known as a swing loan, this is a form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold.

Buydown mortgage
A temporary buydown is a mortgage on which an initial lump sum payment is made by any party to reduce a borrower's monthly payments during the first few years of the loan. A permanent buydown reduces the interest rate over the entire life of the loan.

Cash-out refinance
This is a refinance transaction in which the borrower receives additional cash that can be used for any purpose. The amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens.

Combination loan
This type of loan includes a first mortgage for 80 percent of the loan amount and a second mortgage for the remainder of the loan. Combination loans allow borrowers to avoid PMI. They are also known as 80/10/10, 80/20, and piggyback loans.

Conforming loan
A loan with terms and conditions that follow the guidelines set by Fannie Mae and Freddy Mac. Conforming loan limits change every year.

Construction loan
A short-term loan for financing the cost of construction. The lender makes payments (called draws) to the builder at periodic intervals as the work progresses.

Construction to permanent loan
A single loan that combines a construction loan with a permanent mortgage. After construction is completed and a certificate of occupancy has been issued, the loan converts from a construction loan to a permanent mortgage. This type of loan usually means lower fees and closing costs for the borrower.

Conventional mortgage
A mortgage that is not insured or guaranteed by the federal government.

Convertible ARM
An adjustable rate mortgage (ARM) that can be converted to a fixed-rate mortgage under conditions specified in the loan agreement.

FHA mortgage
A mortgage that is insured by the Federal Housing Administration (FHA); also known as a government mortgage.

Fixed-rate mortgage
A mortgage in which the interest rate does not change during the life of the loan.

Forty- and fifty-year loans
Loans with a term of 40 and 50 years; these loans are designed to reduce the monthly payment for buyers.

Fully amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.

Graduated payment mortgage
A loan in which the payments increase over the life of the mortgage, allowing the borrower to make very low payments at the beginning of the loan.

Home equity line of credit
A credit line that is secured by a second deed of trust on a house. These are revolving accounts that work much like a credit card and can be paid down or charged up for the term of the loan. The minimum payment due each month is interest only.

Home equity loan
A loan secured by a second deed of trust on a house, typically used as a home improvement loan.

Interest-only loan option
Loan payments have two basic components: principal and interest. An interest-only loan has no principal component for a specified period of time. Monthly payments are minimized by eliminating the need to pay down the loan balance during the interest-only period.

Jumbo mortgage
Loans in an amount that exceeds the limit for a conforming loan; also known as a non-conforming loan.

Owner financing
When the property seller provides all or part of the financing.

Stated income mortgage loan
A loan that does not require the borrower to provide documentation of income.

Two-step mortgage
A mortgage loan where the interest rate is fixed for the first seven years and then is adjusted one time for the balance of the loan period.

Zero down home loans
Mortgage loans that do not require a down payment.