September 16, 2016

Loan Features

Loan Features

There are many different loan features available. Some of the most common features of mortgage loans are listed below.

Insurance Products

There are a variety of insurance products that may be offered to you when you get a mortgage loan. Find out more.

Be sure to compare loan products and their different features so you get the product which meets your needs and is right for you.

Closed-End Loan

A loan for a specific amount of money with a specific repayment schedule. You do not have the right to borrow additional funds. A typical car loan is a closed-end loan.

Open-End Loan

A loan where you can borrow money from time to time as you need it up to a credit limit. A typical credit card is an open-end loan.

Adjustable Rate Loan (ARM)

A loan with an interest rate that changes during the term of the loan. The payments generally increase or decrease with the interest rate. The rate is typically based on an index that can be found in newspapers. The interest rate will typically be calculated by adding a number, called the margin, to the index. Some ARMs have interest rate or payment caps so the interest rate or payment will not rise or fall too fast and will never be above or below a certain level.

Fixed-Rate Loan

A loan where the interest rate does not change during the term of the loan.

Some ARMs may have an introductory or "teaser" rate feature. A "teaser" rate will be lower than the true rate on the loan (which is the index plus the margin). You should ask whether the loan you are considering has a teaser rate. If it does, be sure you can afford an increase in your monthly payments at the end of the teaser rate period, when the "fully-index rate" will apply.

For example, on an adjustable rate loan the teaser rate might be 5% for the first 2 years of the loan. If the margin is 3 over the index on that loan, and the index is 6, then the true interest rate on that a loan is 9% (not 5%). After 2 years, when the interest rate begins to adjust, you should expect the interest rate and your monthly payments to increase a lot. Be sure you will be able to afford it.

Different Types of ARM Loans

Convertible ARMS An ARM loan in which you have the option of converting the loan's adjustable rate to a fixed rate, typically upon payment of a fee, sometimes limited to a specified period or specified intervals during the loan term. Combination Fixed Rate/ARM Loans Loans which begin as fixed-rate loans and, at a pre-set time during the loan term (for example, 1 year, 3 years, 5 years, 7 years, 10 years), convert to an adjustable rate. Before you agree to this type of loan, it is important to consider how much the payment can increase when the fixed period ends and whether you will be able to afford the new increased payment. Interest-Only ARMs This mortgage requires payment of interest but not principal for a pre-set time during the loan term. After this pre-set time ends, the loan converts to a fully amortizing loan. When the loan becomes fully amortizing, the payment will be greater than the payment on a loan that was fully amortizing from the start because the principal must be paid off over a shorter period of time. Payment-Option ARMS A complex type of mortgage loan in which the interest rate typically adjusts each month, but the minimum payment on the mortgage remains fixed at a lower amount than is necessary to pay all of the interest and principal that is owing on the loan. This can cause your mortgage balance to increase. While this mortgage allows you to select from a menu of payment choices, ranging from a fully-amortizing payment to a payment that can result in negative amortization (i.e., a payment that is less than the amount of accrued interest for that period), the Truth in Lending disclosure will show only the minimum payment. In addition, once the mortgage balance increases to a set point, you will be required to pay the full interest and principal payment on the mortgage, which is often significantly higher than the minimum payment, which can double, triple or go even higher.

Balloon Payment Loan

A "balloon payment" loan has a payment schedule where one large payment is due at the end of the loan term.

While there may be some advantages to a balloon payment loan (for example, the interest rate or monthly payments may be lower), a balloon payment loan can be a risky transaction. You will probably have to refinance the balloon payment, and your terms may not be as favorable.

Reverse Mortgages

Specialized mortgage loans offered to seniors (62 and over) that allow you to tap into the equity in your home during your lifetime, without having to repay the loan until you die or sell your home. You have the choice of receiving a line of credit, which you can draw down as needed from time to time, or a payment stream, either for a fixed number of years or until death. The loan, including all payments, interest and fees, is repaid when you die, move out or sell the home. This amount may be repaid by you, your family, or your estate, or out of the proceeds from the sale of your home, but payments in excess of the home's value need not be repaid. Any shortfall is usually covered by insurance taken out as a condition of the loan. The most widely available reverse mortgage loan in the U.S. is the federally-insured Home Equity Conversion Mortgage (HECM). Because of the complexity of this product, counseling is required before entering into this loan. As our population ages, more private lenders are offering reverse mortgages, with features different from the HECM product. Be sure to compare products, so you get the product which is right for you.

Insurance Products

There are a variety of insurance products that may be offered to you when you get a mortgage loan.

Homeowner's/Hazard Insurance

This insurance will be required by the lender to cover your property from loss from various hazards including fire, theft, and acts of God. It is your responsibility to buy the insurance (pay the premium) and bring proof of a paid policy (or binder) to the loan closing.

Mortgage Insurance (PMI or MI)

This insurance may be required by the lender if your equity (link to equity definition in Glossary) in the home will be less than 20% after you get the loan (for example, if you are purchasing a home and your downpayment is less than 20% of the purchase price). This insurance protects the lender in the event you do not repay the loan.

TIP

If you do not buy the insurance, the lender can purchase it for you and charge you for the cost, which may then be a lot more expensive than if you bought it yourself.

Title Insurance

This insurance protects against loss in the event there is a problem with the title to the property. Lender's title insurance protects the lender and owner's title insurance protects the homeowner. The lender's title insurance does not protect the homeowner.

Flood Insurance

This insurance protects you from loss due to flood if your property is located in a flood hazard zone. The lender will require you to obtain flood insurance if your property is in a flood zone. (Homeowner's/Hazard insurance typically does not cover losses or damages from flooding.)

Credit Insurance

This is insurance to pay the lender if you die, become disabled, become unemployed, or other similar events. It is completely optional. There are many types, including credit life, credit disability, credit unemployment, credit property, etc.

TIP

Ask yourself if you really need credit insurance. You may already have enough insurance to protect your family in the event of death, disability, or unemployment. If not, you should shop for insurance purchased outside of the mortgage transaction, which may be a better value.

This insurance is intended to pay your mortgage payments or pay off all or part of the entire mortgage if you meet the conditions-for example, credit life is designed to pay in the event of the borrower's death. The insurance may cover the whole term of the loan or a shorter period of time.

Credit insurance can be purchased from the lender either as: (1) a monthly charge that is added to each monthly mortgage payment or (2) as a lump sum that is charged upfront and is generally added to the amount of your loan (sometimes called "single premium insurance"). You will pay interest on the lump sum insurance throughout the life of the loan.