Popular Types of Mortgage Loan Programs
Posted by David Schneider | July 17, 2007

Today’s market is flooded with mortgage loan programs. Some offer traditional terms and conditions. Others offer exotic terms and options. When you go shopping for your mortgage, make sure that you understand which mortgages are going to be appropriate for both your short-term and long-term financial situations.

Traditional Mortgages

The first thing that you will want to look at when shopping for a mortgage is how much you will have to put down on the property. Traditional home loans typically expect you to make a 20 percent down payment. This means that if you want to buy a $250,000 home, you will need to have at least $50,000 for your down payment plus another $7,500 to $10,000 for closing costs.

As you can see from this example, most people are going to have a hard time coming up with this much money. However, if you can put this kind of money together there are several advantages of selecting a traditional mortgage. These advantages include that you earn instant equity in your home, you don’t have to pay for private mortgage insurance and your interest rates and monthly payments are going to be lower than if you take out an 80/20 mortgage.

Piggyback Mortgages

Piggyback mortgages, also referred to as 80/20 home loans, are loan packages that include a first mortgage of 80 percent of the home’s purchase price and a second mortgage of 20 percent of the home’s purchase price. This mortgage program offers borrowers several advantages. First, it eliminates the need to make a down payment. This makes getting into a home easier to do for more people. Second, you don’t have to pay private mortgage insurance. This can save you hundreds of dollars a month. Finally, it offers self-employed people an affordable mortgage option to traditional no-doc home loans.

While piggyback mortgages have many short-term financial benefits, they also have long-term financial drawbacks. They make refinancing much more difficult to do. People who use this type of loan typically have less than ideal borrower profiles. This means that they probably won’t be able to qualify for refinancing later on unless their financial situation improves or changes. In addition, piggyback mortgages tend to have higher first and second mortgage interest rates. Finally, it takes longer for borrowers using this type of mortgage to earn equity in their homes.

Adjustable-Rate Mortgages

Another popular mortgage option is an adjustable-rate mortgage. These mortgages attract borrowers by offering extra low introductory interest rates. This allows people to qualify for loans that are more expensive and it offers low introductory mortgage payments. These mortgages are generally used as a temporary financing option. It is generally expected that borrowers using an ARM will refinance their home before their first rate adjustment occurs. If you are able to sell the property or refinance it for better terms by the time your first rate adjustment occurs, then this is a great option. However, if you don’t sell the property or refinance your home, you may experience payment shock. Payment shock occurs when your interest rate is adjusted and your monthly mortgage payment increases dramatically, making it difficult to afford.