The Real Estate Encyclopedia
What Other Types Of Mortgage Loans Are There And How Do They Work?
Category - Mortgage Questions - Mortgage Loans FAQ's

There are several other types of loans such as the FHA (Federal Housing Authority) and VA (Veterans Administration) loans, creative financing or seller assisted mortgages. 


FHA/VA Mortgages - The Federal Housing Administration (FHA) and the Veterans Administration (VA) offer a wide range of mortgage choices that may appeal to the consumer and may be attractive to senior or retirees. These include 30 and 15 year fixed- rate mortgages, as well as Adjustable Rate Mortgages. These loans are insured by these government agencies and the loans feature low or no down payment terms and are often assumable by future purchasers. VA loans are restricted to individuals qualified by military service or other entitlements, but FHA - insured loans are open to all qualified home purchasers. Note that there are limits to handle moderate-priced homes anywhere in the country. Talk to your lender about FHA/VA possibilities.



Seller-Assisted or Creative Financing Mortgages - This type of financing became popular during the 1980s when interest rates went to very high levels. Seller-assisted creative financing usually means the seller of the home helps with the financing the loan.


One type of mortgage you are likely to run into with seller financing is the balloon payment mortgage. Balloons, as they are known, are usually offered as short-term fixed rate loans. The balloon payment mortgage gets its name from the payment schedule, which involves smaller payments for a certain period of time and one large payment for the entire amount of the outstanding principal. They have terms of 3, 5, and sometimes 15 years, though payments are usually calculated as though it were a 30 year loan. Sometimes a balloon will be offered as a second mortgage where you also assume the homeowner's first mortgage. The major disadvantage with a balloon payment loan is that it may be difficult to save up the money to make the final large payment (often the entire amount of the principal) while paying interest on the loan. Balloons can be an advantage if you plan on living in an appreciating house for a short period of time and want to pay less while you live there.


Reverse Annuity Mortgage (an option for senior or retirees) - The Reverse Annuity Mortgage (RAM). Is an option for retirees living on fixed incomes, the equity in their paid-for or almost-paid-for home represents a large but liquid asset. The RAM is designed to help supplement those homeowners' income.


The lender who will issue a RAM appraises the property and makes the loan based on a percentage of its present market value. The homeowner retains ownership, and the property secures the loan. The lender then pays an annuity to the borrower, usually on a monthly basis, up to an amount equal to the equity they have in the home.


The advantage of such a loan for older Americans is that of receiving a monthly tax-free income. Under one plan, this income is available for life or until the house is sold at the homeowner moves. The payments depend on the value of the home and the age of the owner. There are risks involved, however if the homeowner wants to move and buy a new house, there may not be enough equity in the home to permit such a plan or the home owner may forfeit substantial appreciation value while still living in the home when committing to such an arrangement. 

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