RFINANCE6: Loan Terms and Payment Plans

Blanket Loan

A blanket loan covers more than one parcel of real estate, owned by the same buyer, as collateral for the same mortgage. Developers often use a blanket loan to secure construction financing for a proposed subdivision or a condominium project. Because of the nature of development and construction, the developer needs to have some way to release single parcels of the project as they are completed. The mechanism for doing this is a release clause. The developer seeks to have this release, or partial release, clause inserted in the mortgage, so that he or she can obtain a release from the blanket mortgage for each lot as it is sold. For example, if a developer gets a $500,000 mortgage for the development of 50 lots, the lender might require that he or she pay off $12,500 of principal for the release of each lot. If a release clause is not included in the mortgage document, the developer would be required to pay off the entire loan balance before he or she could sell any of the individual parcels lien free. Under these circumstances, the developer could choose to sell the parcels without paying off the mortgage, but that would create a host of problems for the individual buyers. For example, if the developer did not make payments on time, the buyers could be wiped out in a foreclosure. For this reason, developers usually seek to have a recognition clause included in the blanket mortgage. With a recognition clause, the lender agrees to recognize the rights of each individual parcel owner, even if the developer defaults and there is a foreclosure. In another situation, a borrower who purchases a house plus an adjacent lot could choose to finance the purchase with a single mortgage using a blanket loan to cover both properties. Sometimes the federal government secures a blanket lien against someone who has defaulted on his or her income taxes.

Bridge Loan

A bridge loan is a short-term loan that covers the period between the end of one loan and the beginning of another. Bridge loans are typically used in two situations: To cover the time period between the end of a construction loan and the issue of a permanent loan on a property. When a person needs to borrow money on his or her unsold home (a second mortgage of sorts) to fund the acquisition of a new home. This is useful when a seller will not accept a property sale contingency. A bridge loan is usually an interest-only term loan that requires a balloon payment at the end of the term.

All ARMs originated from a federally-insured lending institution must comply with Regulation Z. A lender offering an ARM must provide the borrower with the following:

A brochure describing ARMs Details of the specific program the lender is offering An example that illustrates how the payments and loan balance on a $10,000 loan have been affected by changes in the index.

Buydown

A buydown is a variation of the PAM described above. In a buydown, the lump sum payment that is made to the lender at closing usually comes from a builder as an incentive to the buyer or from a family member trying to help out. That payment serves to reduce the interest rate on the loan for the first few years. At the end of that time, the rate rises. The lender assumes the borrower's income will also have risen during these years and he or she will be able to make the increased payments.

Construction Loan

A construction loan is a type of open-end mortgage, also known as interim financing. A construction loan finances the cost of labor and materials as they are needed and used throughout a building project. Construction loans are different from other open-end loans because the collateral typically used to secure the loan has not yet been built, so only the land itself is available as collateral when the lender makes the original loan. Lenders will typically make a commitment for a loan at 75 percent of the property's total value. Construction loans are also different because the lender has to know the "story" behind the planned construction before it will be willing to lend money to the borrower. Construction loans don't pay out all at once. Borrowers usually get between five and ten advances, called draws, which coincide with certain stages of construction such as: Pouring the foundation Framing Installing heating and cooling systems, wiring, and plumbing systems Installing cabinets, flooring and fixtures Finishing work (painting, carpeting, etc.) Interest rates on construction loans are usually higher than on other loans because the risk is greater. Risks include: Inadequate protection against mechanics' liens Potential delays in construction completion Financial failure of contractors or subcontractors The borrower pays interest on only the money that has been actually disbursed up to the payment date. Construction loans are usually short-term and are converted or replaced by a standard mortgage once construction is finished. Some people get a construction-only loan in which the lender finances only the building of the home. Borrowers then have the choice to shop around for another lender and/or a lower rate once the home building is complete. Other borrowers prefer to get a construction-to-permanent loan in which their construction loan is converted into a standard loan by the same lender, once the borrower has a certificate of occupancy. This saves time and money since the borrower only has to fill out one mortgage application and close once. The lender and borrower decide at close on the type of mortgage the construction loan will be converted to. Some lenders allow the borrower to lock in the mortgage rate for up to 12 months during construction. This is an advantage because the borrower avoids the risk of rising rates. However, some lenders offer a float-down option which allows the borrower to take advantage of rate dips.

Growing Equity Mortgage

A growing equity mortgage (GEM) is a fixed-rate mortgage whose payments increase by a fixed amount over a given schedule for an established period of time, often the entire term of the loan. The monthly payment may increase monthly or annually. The increase in payment is applied directly toward the principal of the loan. This technique allows the homeowner to build equity in the underlying home faster than if he or she made the same mortgage payment for the life of the loan. The interest rate on growing equity mortgages is fixed. There are some advantages to growing equity mortgages. The low up-front payments may make it easier for first-time home buyers to qualify for and afford a loan. A GEM is usually paid off faster than a traditional fixed-rate mortgage. The major disadvantage of a growing equity mortgage is that the payment continues to go up, regardless of the borrower's income or financial position. This can lead to potential problems for the borrower being able to meet future mortgage payments. Growing equity mortgages are available in 15- and 30-year terms.

Hard Money Loan

A hard money loan is any mortgage loan that is given to a borrower in exchange for cash. Hard money loans are typically issued at much higher interest rates than conventional commercial or residential property loans and are almost never issued by a commercial bank or other deposit institution. Often a hard money loan will be a second mortgage given to a private mortgage company in exchange for cash that may be needed to deal with a personal financial crisis, such as a bankruptcy. In this case, the borrower is pledging the equity in the home as collateral for the hard money mortgage.

Package Loan

A package loan is one that finances the purchase of a home along with the purchase of personal items, such as a washer, a dryer, a refrigerator, an air conditioner, carpeting, draperies and furniture or other appliances. The financing instrument describes the real property and then states that the specifically-named personal home items are fixtures, and therefore part of the mortgaged property. The monthly payments on the loan include the principal, interest and some pro-rated payment for the appliances. Some lenders like to use package mortgages because they believe they will have less risk of default. Borrowers can pay for the essential personal items over the extended period of the loan, rather than have to exhaust their reserves to purchase the items outright. In addition, most consumer loans for furniture and appliances carry much higher interest rates and must be paid back within a much shorter term than the mortgage loan. Another incentive to use this kind of loan package is the fact that the interest on the home loan is tax-deductible, while the interest on a consumer loan is not. This type of loan is very popular in the sale of new subdivision homes and furnished condominiums. Also many commercial rental properties, such as apartment buildings, office buildings and clinics, are specifically tailored for package loans.

Pledged Account Mortgage

A pledged account mortgage (PAM) is a type of graduated payment mortgage under which the owner/borrower contributes a sum of money into an account that is pledged to the lender. The account is drawn on during the first three to five years of the loan to supplement the periodic mortgage payments, thereby reducing the borrower's monthly payments in the initial years. Once the account is empty, the borrower makes the full mortgage payment. Here's an example. Jim gets a pledged account mortgage for a $90,000 home. He makes a down payment of $10,000, which the lender puts in a pledged account. Jim makes the payments based on a mortgage principal of $90,000, but his actual payments are reduced in the first three to five years by drawing a subsidy from the $10,000 pledged account.

Purchase Money Loan

A purchase money loan is most commonly a technique in which the buyer borrows from the seller in addition to the lender. The purchase money mortgage is created at the time of the purchase and delivered at the time the property is transferred as part of the sale transaction. This is sometimes done when a buyer cannot qualify for a bank loan for the full amount, so the seller "takes back" a portion of the purchase price as a second or junior mortgage. A purchase money loan can also be a senior or first loan.

Renegotiable Rate Mortgage

A renegotiable rate mortgage (RRM) is another type of variable rate mortgage. This mortgage is amortized over 30 years but must be renewed at three-, four-, or five-year intervals. At the time of renewal, the lender can increase the interest rate, but by no more than ½ of 1 percent for each year of the initial term. As a result, on a three-year renegotiable rate, the maximum rate adjustment allowed is 1½ percent. On a five-year term it is 2½ percent. There is a 5 percent limit on upward adjustments during the life of the loan. The lender must make downward adjustments if the lender's borrowing costs decline. Note: If the new terms are unacceptable to the borrower, he or she can pay the loan in full or refinance at prevailing interest rates.

Reverse Annuity Mortgage

A reverse annuity mortgage (RAM) is quite different from other mortgages. With a reverse annuity mortgage, the lender is making payments to the borrower. This system is particularly attractive to senior citizens who often have fixed incomes that are low. The RAM allows older property owners to receive regular monthly payments from the equity in their paid-off property without having to sell. The paid-off property is pledged to the lender as collateral. In return, the lender sends a regular monthly check (or annuity) to the borrower until a certain balance has been reached. The borrower pays interest on the loan and then the loan is repaid when the home sells or from the borrower's estate upon his or her death. To qualify for most reverse mortgages, the borrower must be at least 62 and live in the home. The proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free, and many reverse mortgages have no income restrictions. There are three basic types of reverse mortgages: Single-purpose reverse mortgages - These are offered by some state and local government agencies and nonprofit organizations. Federally-insured reverse mortgages - These are known as Home Equity Conversion Mortgages (HECMs) and are backed by the U. S. Department of Housing and Urban Development (HUD). Proprietary reverse mortgages - These are private loans that are backed by the companies that develop them. Single-purpose reverse mortgages generally have very low costs. But they are not available everywhere, and they can be used for only one purpose specified by the government or nonprofit lender. Examples of uses for single-purpose reverse mortgages are to pay for home repairs, improvements, or property taxes. In most cases, a borrower qualifies for these loans only if his or her income is low or moderate.

Shared Appreciation Mortgage

A shared appreciation mortgage (SAM) is a mortgage in which the lender agrees to an interest rate lower than the prevailing market rate, in exchange for a share of the appreciated value of the collateral property. The share of the appreciated value is known as the contingent interest. The contingent interest is established and due at the sale of the property or when the mortgage terminates. For example, let's assume that the current interest rate is 6%, and the property was purchased for $300,000. The borrower puts down $60,000 and takes out a mortgage of $240,000 amortized over 30 years. The lender and the borrower agree to a lower interest rate of 5% and to a contingent interest of 20% of appreciated value of the property. Because of the lower interest rate, the monthly payment is reduced from $1,439 to $1,288. However, this saving in monthly payments comes with a trade-off. Let's assume the property is later sold for $450,000. Because of the agreement on the contingent interest, the borrower must pay the lender 20% of the profit, namely $30,000. By sharing in the appreciation of the property, the lender is taking a risk that is related to the property's value. So, whether this trade-off is favorable will depend on the conditions of the housing market at the time of sale. If the property's value decreases, the borrower would still owe whatever principal is outstanding. But if the borrower sells the property for a loss, the contingent interest is zero. The Internal Revenue Service stipulates conditions under which the contingent interest in a shared appreciation mortgage may be considered tax-deductible mortgage interest. Because of the complexity of tax laws and terms that may apply to individual situations, a borrower should always employ a real estate attorney when obtaining a shared appreciation mortgage.

Wraparound Loan

A wraparound loan allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan. The second lender issues a new larger loan to the borrower at a higher interest rate. The new loan is a combination of the first loan and the second loan. The borrower makes the new higher payments to the second lender, and then the second lender pays the first lender out of those funds. For example, Sam has a $70,000 mortgage on his home. He sells his home to Brad for $100,000. Brad pays $5,000 down and borrows $95,000 on a new mortgage. This mortgage "wraps around" the existing $70,000 mortgage because the new lender will make the payments on the old mortgage. A wraparound loan is attractive to lenders because they can leverage a lower interest rate on the existing mortgage into a higher yield for themselves. For example, suppose the $70,000 mortgage in the above example has a rate of 6% and the new mortgage for $95,000 has a rate of 8%. The lender's cash outlay is $25,000 on which he earns 8%, but in addition he earns the difference between 8% and 6% on $70,000. His total return on the $25,000 is about 13.5%. To do as well with a second mortgage, he would have to charge 13.5%. Usually, but not always, the lender is the seller. A wraparound is one type of seller-financing. The alternative type of home-seller financing is a second mortgage. Using the alternative, Brad obtains a first mortgage from an institution for $70,000 and a second mortgage from Sam for the additional $25,000 that Brad needs. The major difference between the two approaches is that with second mortgage financing, the old mortgage is repaid, whereas with a wraparound it isn't. A wraparound loan is often used in a refinancing situation or for the purchase of a home when a buyer cannot prepay the existing mortgage, either because of a lock-in clause or a high prepayment penalty. Note: A wraparound mortgage is only possible if the original loan documents allow it.

Open-End Loan

An open-end loan is an expandable loan in which the lender gives the borrower a limit up to which he or she may borrow. Each advance the borrower takes is secured by the same mortgage. This loan is also known as a mortgage or deed of trust for future advances. Often the money that the lender advances is principal already paid. This type of loan can save the borrower the time and expense of refinancing the property at some future date. The borrower repays the advanced funds either through an extension of the loan term or through an increase in the monthly payments. It's also possible for the lender to adjust the interest rate to assist the repayment. Borrowers can use the funds advanced by an open-end loan to purchase personal property. The lender adds the advanced amount to the principal and adjusts the borrower's payment to account for the new balance. If that personal property later becomes part of the collateral for the loan, the loan would be converted to a package mortgage, which we will discuss on an upcoming screen. An open-end loan usually has more favorable terms than a home improvement loan, which usually has a higher interest rate and must be repaid in a shorter period of time. As we mentioned, at the time of an advance the interest rate on the new money may be the current market rate. It would be wise for the lender on the open-end loan to require a lien search or a title update before each advance so that the lender is sure that no intervening recorded liens have priority over the mortgage. Farmers often use open-end loans to get money to meet their seasonal operating expenses. Builders use open-end loans when they obtain construction loans, so they can get advances to complete different phases of the building.

Loan Formats

As we discussed in an earlier unit, the note and mortgage, deed of trust and land contract are all very flexible with regard to their format. Lenders can use these financing instruments in creative ways to meet the needs of the individual borrower. A number of different options exist. Open-End Loan Blanket Loan Construction Loan Package Loan Mobile or Manufactured Home Loan Purchase Money Loan Hard Money Loan Bridge Loan Wraparound Loan Participation Loan Leasehold Loan

There are many possible ARM indexes. Each one has distinct market characteristics and fluctuates differently. The most common indexes are:

Constant Maturity Treasury (CMT or TCM) - These are the weekly or monthly average yields on U.S. Treasury securities adjusted to constant maturities. Treasury Bill (T-Bill) - These are based on the results of auctions that the U.S. Treasury holds for its Treasury bills, notes and bonds. 12-Month Treasury Average (MTA or MAT) - This is a relatively new ARM index. This index is the 12-month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. It is calculated by averaging the previous 12 monthly values of the 1-Year CMT. Certificate of Deposit Index (CODI) - This is the 12-month average of the monthly average yields on the nationally published 3-Month Certificate of Deposit rates. 11th District Cost of Funds Index (COFI) - This index reflects the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada. Cost of Savings Index (COSI) - This index is the weighted average of the rates of interest on the deposit accounts of the federally-insured depository institution subsidiaries of Golden West Financial Corporation (GDW). All of the depository institution subsidiaries of Golden West Financial Corporation operate under the name World Savings. London Inter Bank Offering Rates (LIBOR) - London Inter Bank Offering Rate (LIBOR) is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. Certificates of Deposit (CD) Indexes - These indexes are averages of the secondary market interest rates on nationally traded Certificates of Deposit. Bank Prime Loan (Prime Rate) - The Prime Rate is the interest rate charged by banks for short-term loans to their most creditworthy customers whose credit standing is so high that little risk to the lender is involved. Only a small percentage of customers qualify for the prime rate, which tends to be the lowest going interest rate and thus serves as a basis for other, higher risk loans. CMT, COFI, and LIBOR are the most frequently used. Approximately 80 percent of all the ARMs today are based on one of these.

Check Your Understanding-Answers

Define an open-end loan and name one common type of open-end loan. An open-end loan is an expandable loan in which the lender gives the borrower a limit up to which he or she may borrow. Each advance the borrower takes is secured by the same mortgage. A construction loan is a common type of open-end loan. What two clauses are important to have in a blanket loan? Release clause and recognition clause What type of loan is very popular in the sale of new subdivision homes and furnished condominiums and why? A package loan finances the purchase of a home along with the purchase of personal items. It is popular with both lenders and borrowers because they believe there is less risk of default. Borrowers can pay for the essential personal items over the extended period of the loan, rather than have to exhaust their reserves to purchase the items outright. Describe a wraparound loan. A wraparound loan allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan.

Check Your Understanding-Answers

Describe a graduated payment mortgage. With a graduated payment mortgage (GPM), the monthly payment for principal and interest gradually increases by a certain percentage each year for a certain number of years and then it levels off for the remaining term of the mortgage. How many GPM plans does FHA offer and how are they structured? FHA has five plans available. Three of the five plans permit mortgage payments to increase at a rate of 2.5, 5, or 7.5 percent during the first 5 years of the loan. The other two plans permit payments to increase 2 and 3 percent annually over 10 years. Starting at the sixth year of the 5-year plans and the eleventh year of the 10-year plans, payments will stay the same for the remaining term of the mortgage. List three ARM indexes. (See Screen 4 for other correct answers.) Certificate of Deposit Index (CODI) Treasury Bill (T-Bill) London Inter Bank Offering Rates (LIBOR) What is an interest rate cap and how many are there? Interest rate caps limit the amount of interest the borrower can be charged. There are two types of caps: periodic, which limit the amount the rate can change at any one time, and overall, which limit the amount the interest can increase over the life of the loan.

Check Your Understanding-Answers

Describe a two-step mortgage. The two-step mortgage is an ARM loan program in which the interest rate is adjusted only one time - usually five or seven years after the loan is originated. List two advantages of growing equity mortgages. The low up-front payments may make it easier for first-time home buyers to qualify for and afford a loan. A GEM is usually paid off faster than a traditional fixed-rate mortgage. Define a reverse mortgage and list three types. With a reverse annuity mortgage, the lender is making payments to the borrower. There are three basic types of reverse mortgage: Single-purpose reverse mortgages - These are offered by some state and local government agencies and nonprofit organizations. Federally-insured reverse mortgages - These are known as Home Equity Conversion Mortgages (HECMs) and are backed by the U. S. Department of Housing and Urban Development (HUD). Proprietary reverse mortgages - These are private loans that are backed by the companies that develop them. What is a biweekly loan and what's the advantage? With a biweekly loan, the borrower pays half of the monthly mortgage payment every 2 weeks, rather than the full payment once a month. This is comparable to 13 monthly payments a year, which can result in faster payoff and lower overall interest costs.

The FHA-245 program is a popular graduated payment mortgage program.

FHA-245 has five plans available. Three of the five plans permit mortgage payments to increase at a rate of 2.5, 5, or 7.5 percent during the first 5 years of the loan. The other two plans permit payments to increase 2 and 3 percent annually over 10 years. Starting at the sixth year of the 5-year plans and the eleventh year of the 10-year plans, payments will stay the same for the remaining term of the mortgage. The greater the rate of increase and the longer the period of increase, the lower the mortgage payments in the early years.

Lease-Purchase

In a lease purchase arrangement, a tenant enters into two agreements simultaneously - an agreement to purchase and a lease. The tenant agrees to purchase the property, but operates under the lease until the terms of the purchase agreement are fully satisfied. Often a part of the lease payment is applied to the purchase price until one of the following happens: The price is reduced enough for the tenant to obtain financing to complete the purchase. Over time, the total of all payments has met the prearranged purchase price. Lease Option A lease option is a clause in a lease that gives the tenant the right to purchase the property under specific conditions - usually at a predetermined price and within a set period of time. The owner can choose to give the tenant credit toward the purchase price for some of the rent paid, but this is not a requirement.

Summary/Review

Over the past few years, alternatives to this standard fixed-rate loan have become increasingly more popular. Having more creative choices available for borrowers allows lenders to make more loans to more buyers and at higher loan amounts. With a graduated payment mortgage (GPM), the monthly payment for principal and interest gradually increases by a certain percentage each year for a certain number of years and then it levels off for the remaining term of the mortgage. The FHA-245 program is a popular graduated payment mortgage program. With an adjustable-rate mortgage (ARM), the interest rate is linked to an economic index. The loan starts at one rate of interest, but then it fluctuates up or down over the life of the loan as the index changes. The loan agreement describes how the interest rate will change and when. The interest rate the borrower pays is usually the index rate plus a margin. An adjustment period establishes how often the lender can change the rate - monthly, quarterly or annually. Interest rate caps limit the amount of interest the borrower can be charged. A payment cap limits how much the monthly payment can increase. Sometimes lenders offer conversion options. This would allow the borrower to convert the ARM to a fixed-rate loan at certain times during the life of the loan. As financial communities try to make funds available to those who need real estate loans, new and different variations of payment plans become available. Here is a recap of some of the most common plans. The two-step mortgage is an ARM loan program in which the interest rate is adjusted only one time - usually five or seven years after the loan is originated. A growing equity mortgage (GEM) is a fixed-rate mortgage whose payments increase by a fixed amount over a given schedule for an established period of time, often the entire term of the loan. With a reverse annuity mortgage, the lender is making payments to the borrower. The RAM allows older property owners to receive regular monthly payments from the equity in their paid-off property without having to sell. There are three basic types of reverse mortgage. Single-purpose reverse mortgages Federally-insured reverse mortgages Proprietary reverse mortgages A shared appreciation mortgage (SAM) is a mortgage in which the lender agrees to an interest rate lower than the prevailing market rate, in exchange for a share of the appreciated value of the collateral property. A pledged account mortgage (PAM) is a type of graduated payment mortgage under which the owner/borrower contributes a sum of money into an account that is pledged to the lender. In a buydown, the lump sum payment that is made to the lender at closing usually comes from a builder as an incentive to the buyer or from a family member trying to help out. A renegotiable rate mortgage (RRM) is another type of variable rate mortgage. This mortgage is amortized over 30 years but must be renewed at three-, four-, or five-year intervals. With a bi-weekly payment mortgage, the borrower pays half of the monthly mortgage payment every two weeks, rather than the full payment once a month. The main benefit of a zero percent-down mortgage is that it can enable a person to purchase a home now instead of having to wait to save for a down payment, which could take years. Lenders can use a note and mortgage, a deed of trust or a land contract document in creative ways to meet the needs of individual borrowers. Let's recap some of the different options that exist. An open-end loan is an expandable loan in which the lender gives the borrower a limit up to which he or she may borrow. Each advance the borrower takes is secured by the same mortgage. This loan is also known as a mortgage or deed of trust for future advances. A construction loan is a type of open-end mortgage, also known as interim financing. A construction loan finances the cost of labor and materials as they are needed and used throughout a building project. A blanket loan covers more than one parcel of real estate, owned by the same buyer, as collateral for the same mortgage. A package loan is one that finances the purchase of a home along with the purchase of personal items, such as a washer, a dryer, a refrigerator, an air conditioner, carpeting, draperies and furniture or other appliances. Since the depreciation on mobile homes in the first few years is pretty steep, many lenders prefer to give mobile home loans with a 15-year term instead of the typical 30-year term. A purchase money loan is most commonly a technique in which the buyer borrows from the seller in addition to the lender. A hard money loan is any mortgage loan that is given to a borrower in exchange for cash. A bridge loan is a short-term loan that covers the period between the end of one loan and the beginning of another. A wraparound loan allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan. A participation loan involves the lender sharing an interest in the property. With long leases in place, lenders are willing to allow tenants to pledge their interests as collateral for improvement loans. This is referred to as a leasehold loan.

Mobile or Manufactured Home Loan

Over the past several years, the market for manufactured and mobile homes has grown dramatically. Many of these homes have sale prices over $50,000, so borrowers need to be able to finance them. Lenders have shown some concern over the fact that delinquencies and foreclosures in this area of real estate have escalated. Because of this, many lenders require at least 10 percent down on a 30-year loan and also require some sort of upfront fee. There are 20-year loans available with smaller down payment amounts, but the monthly payments on these loans are higher. Some of the difficulty in getting loans on mobile and manufactured homes comes from the uncertainty about whether these homes are real property or personal property. Small campers and travel homes that hitch to the back of a car are easy to define as personal property. But in this age of more sophisticated homes that attach to cars but can be parked at trailer home sites, the decision of real versus personal property becomes more difficult. Larger mobile homes are typically built in factories and can be transported only by professional home movers. These homes attach permanently to lots in mobile home parks or are set up and attached to property that the homeowner has previously purchased. If the owner of the mobile home has a long-term lease with a rental park or has title to the property on which the home will be set, the home will be considered real property and the borrower will be eligible to get a real estate loan. Since the depreciation on mobile homes in the first few years is pretty steep, many lenders prefer to give loans with a 15-year term instead of the typical 30-year term. Some lenders are willing to extend 20-year loans on some of the larger mobile home units. The loans are secured by a lien on the mobile home's title registered with the state licensing agency. Mobile home loans can be underwritten by the FHA or the VA.

Interest rate caps limit the amount of interest the borrower can be charged. There are two types of caps:

Periodic caps limit the amount the rate can change at any one time. These caps vary from one lender to another, but are typically one to two percentage points per year. Overall (or aggregate) caps limit the amount the interest can increase over the life of the loan. This cap can range up to 6 percent. A payment cap limits how much the monthly payment can increase. A common payment cap is 7.5 percent of the initial payment. In this instance, a monthly payment of $900 could not vary either up or down by more than $67.50 per month in any one-year period. While this appears to be a good thing, it could be a problem if the payment cap prevents the payment from covering the interest. When that happens, the unpaid interest is added back to the loan, generating even more interest and debt. If this trend continues, the borrower will make many payments but end up owing more than he or she did at the beginning of the loan, creating a negative amortization. Sometimes lenders offer conversion options. This would allow the borrower to convert the ARM to a fixed-rate loan at certain times during the life of the loan.

Many people own property on a leasehold basis.

That is, they don't own the building or property itself, but they own the right to occupy their space for a specified number of years. Many leases are for long periods of time - some for 99 years or longer. With long leases in place, lenders are willing to allow tenants to pledge their interests as collateral for improvement loans. Some of these loans are even eligible for underwriting by the FHA or VA, provided the lease term meets certain guidelines set up by these agencies. Life insurance companies, mutual savings banks, and commercial banks are the primary lenders on leasehold loans. Because lenders must retain a first lien position on a loan, most leasehold loans include both the land and the building as collateral. This means that the landlord must subordinate his or her fee simple rights on the property to the new lien. This protects the lender in the event of a default that leads to a foreclosure, as the lender will have the legal right to recover both the land and the building. In some rare situations, the landlord would not have to pledge the land to the lender. One example of this would be if a very large, well-known corporation such as Wal-Mart wanted a loan to build a new store on leased land. A corporation such as this could obtain the loan on a signature alone, pledging only its leasehold interests. This is called a credit loan.

Below is an example of a fixed-payment mortgage and a graduated-payment mortgage.

The loan amount is $100,000, the interest rate is 8.5 percent, and the term is 30 years (figures are rounded to the nearest dollar). The rate of increase used in the example is 7.5 percent for each of the first five years. Year Level Payment Graduated Payment Difference 1 $769 $579 - $190 2 $769 623 - 146 3 $769 669 - 100 4 $769 719 - 50 5 $769 773 + 4 6-30 $769 831 + 62 Note: if you would like to calculate other graduated payment mortgage amounts, you can search on the Internet using the keywords "graduated payment mortgage calculator".

Two-Step Mortgage

The two-step mortgage is an ARM loan program in which the interest rate is adjusted only one time - usually five or seven years after the loan is originated. The new rate remains in effect for the remainder of the loan term. The interest rate for the initial period is usually below market rates. When the new interest rate is adjusted, the borrower has the option of selecting an adjustable-rate mortgage that will periodically fluctuate each year, depending on a predetermined index, or a fixed-rate mortgage. Essentially, a two-step mortgage offers borrowers the benefits of both a fixed-rate and an adjustable-rate mortgage. The borrower can enjoy the stability of a fixed-rate loan during the initial period of the mortgage term at a lower rate. The most common combinations of two-step mortgages are 5/25 and 7/23 loans. For these two mortgage loans, the initial period is five or seven years where the interest rate is fixed. After the initial period, the new adjusted interest rate is effective for the remainder of the 25- or 23-year mortgage term. The initial interest rates for 5/25 and 7/23 loans are usually lower than the interest rate of a 30-year fixed loan. At the end of the initial term, there are no refinancing fees, forms, or re-qualification required to switch to the new mortgage type and interest rate. As with a conventional adjustable rate mortgage, a two-step mortgage also usually has a maximum limit that the interest rate can increase. This precaution protects the borrower in case the market interest rate increases dramatically. In most cases, the new interest rate can never increase more than a set, pre-determined number of percentage points more than the original fixed rate. This type of program is especially helpful for borrowers who plan to move within a few years and can repay the loan before the interest rate is increased. Another viable situation for a two-step mortgage is when interest rates are too high to lock in a rate for the entire term of the loan. Borrowers who want a fixed-rate mortgage and predict that interest rates will drop in five or seven years may opt for a two-step mortgage.

Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages tend to be more costly than other home loans.

The up-front costs can be high, so they are generally most expensive if the borrower stays in the home for just a short time. They are widely available, have no income or medical requirements, and can be used for any purpose. Here are some important points for borrowers to know about HECMs and proprietary reverse mortgages. Before applying for an HECM, the borrower must meet with a counselor from an independent government-approved housing counseling agency. The counselor must explain the loan's costs, financial implications and alternatives. For example, counselors should tell borrowers about government or nonprofit programs for which they may qualify, and any single-purpose or proprietary reverse mortgages available in the area. The amount of money a borrower can have access to with a HECM or proprietary reverse mortgage depends on several factors, including the borrower's age, the type of reverse mortgage selected, the appraised value of the home, current interest rates and where the home is located. In general, the older the borrower is the more valuable the home is and the less that is owed on it, the more money the borrower can get. The HECM gives the borrower choices in how the loan is paid out. The borrower can select fixed monthly cash advances for a specific period or for as long as he or she lives in the home. Alternatively, the borrower can opt for a line of credit, which allows a draw on the loan proceeds at any time in amounts that the borrower chooses. The borrower also can get a combination of monthly payments plus a line of credit. HECMs generally provide larger loan advances at a lower total cost compared with proprietary loans. But owners of higher-valued homes may get bigger loan advances from a proprietary reverse mortgage. In other words, if the home has a higher appraised value without a large mortgage, then the borrower may qualify for more money.

As financial communities try to make funds available to those who need real estate loans, new and different variations of payment plans become available. The needs of the consumer change and the investment markets also change. There are a number of creative payment plans available to borrowers. These are the most common.

Two-Step Mortgage Growing Equity Mortgage Reverse Annuity Mortgage Shared Appreciation Mortgage Pledged Account Mortgage Buydown Renegotiable Rate Mortgage Lease-Purchase Lease Option Biweekly Loan Zero Percent Financing

Zero Percent Financing

While most lenders require a down payment of at least 5 percent, some offer borrowers the opportunity to put 3 percent down, and possibly even zero percent down. In addition to that, some mortgage companies include a portion of the closing costs in the loan, bumping the amount of the loan over the value of the house by an additional 3 percent or more. To qualify for a zero percent-down mortgage, most lenders require a stable income and a stellar credit rating -- generally 700 or higher. Depending on the lender, there also may be income requirements as well as caps on the amount of the loan. The main benefit of a zero percent-down mortgage is that it can enable a person to purchase a home now instead of having to wait to save for a down payment, which could take years. While this can present a tremendous opportunity for many people, there are downsides to consider as well. To begin with, the interest rate on a zero percent-down loan will be higher than that of a conventional loan - approximately a quarter to half a percentage point more, depending on the borrower's individual situation. In addition, the borrower will have no equity in his or her home, which means the borrower may end up owing more than the home is worth if property values decline even slightly.

Graduated Payment Mortgage

With a graduated payment mortgage (GPM), the monthly payment for principal and interest gradually increases by a certain percentage each year for a certain number of years and then it levels off for the remaining term of the mortgage. This type of plan might be especially attractive to someone who is just starting a career and expects that his or her income will increase over time. This plan allows a person to start out with a lower monthly payment than he or she would have with a traditional fixed-payment plan. The buyer can qualify for the loan based on expected salary increases along with the expectation that the value of the home will also increase over time.

Adjustable Rate Mortgage

With an adjustable-rate mortgage (ARM), the interest rate is linked to an economic index. The loan starts at one rate of interest, but then it fluctuates up or down over the life of the loan as the index changes. The loan agreement describes how the interest rate will change and when.

Biweekly Loan

With bi-weekly payments, the borrower pays half of the monthly mortgage payment every 2 weeks, rather than the full payment once a month. This is comparable to 13 monthly payments a year, which can result in faster payoff and lower overall interest costs. For example, the bi-weekly mortgage payment process can pay off a 30-year loan in approximately 24 years. See the table below. Loan Term: 30 years Regular Monthly Payments Bi-Weekly Payments Beginning Loan Amount: $100,000 $100,000 Interest Rate: 6.25% 6.25% Monthly Payment: $615.72 $615.72 (307.86 x 2) Total Interest Paid: $121,656 $94,629 Total Interest Saved: 0 $27,027 Loan will be paid off: in 30 years in 24.3 years

A participation loan involves the lender

sharing an interest in the property. When money is tight or interest rates are particularly high, the lender runs a greater risk with the loan. To account for this, the lender may want to ensure a greater return by sharing in the property's interest. The lender can accomplish this in a number of ways. The lender can participate in the revenue by getting a percentage of the gross income or a percentage of the net income. The lender can share in the equity of the property by taking a certain agreed-upon percentage of ownership of the property itself. The lender could charge a one-time fee or points as a condition of making the loan. The lender could choose to participate in profits rather than income. If the lender thinks the venture will increase in value, it may choose to share in the capital gains at the time of sale, rather than the income during the period the owner holds the property. In very large projects, where one lender may not have the funds to finance the loan individually, two or more lenders can join together and pool their resources to finance the project. This is often referred to as a partnership of lenders. Another type of participation loan involves several borrowers' sharing the responsibility for one loan on a multifamily property, a cooperative. Cooperatives take three forms: Trust - Trust company legally owns the cooperative and issues certificates to purchasers, allowing them to lease units in the building. Corporate - Corporation legally owns the cooperative and issues stock to purchasers, allowing them to lease a unit from the corporation. Individual - Purchaser receives a deed for a proportionate undivided interest in the property and has the right to occupy a particular unit.

With a GPM loan,

the buyer may have initial payments that are less than the interest-only portion of the loan at that point. The interest owed and not paid in the initial months is added back to the principal causing what is referred to as negative amortization.

The interest rate the borrower pays is usually

the index rate plus a margin. The margin is the lender's "mark-up." It represents the lender's cost of doing business. The margin is added to the index at every adjustment period. An adjustment period establishes how often the lender can change the rate - monthly, quarterly or annually.