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Pros and Cons of Alternative mortgages

The most common types of mortgages available are fixed-rate mortgages and adjustable-rate mortgages.

What many consumers do not realize is that there are a variety of other types of mortgages that are not nearly as well known or publicized.

In an article titled, “Other types of mortgages,” posted on Bankrate.com, May 1, 2006, the author lists the other types of mortgages that are not as well known as the first two listed above.

The alternative types of mortgages available are: jumbo mortgages, two-step mortgages, balloon mortgages, assumable mortgages, construction mortgages and seller financing. The author lists the advantages and disadvantages to each loan and gives a good overview of what each has to offer.

Jumbo mortgages let you borrow more than the single-family limit set by Fannie Mae and Freddie Mac. The author lists the pros and cons to this type of mortgage as, “Pro: Opportunity to buy larger, more expensive home and Con: pay a higher interest rate in exchange for the lender’s higher risk.”

Two-step mortgages combine elements from adjustable-rate mortgages and fixed-rate mortgages.

“Pro: Opportunity for damaged-credit borrowers to buy homes and establish better credit and Con: If your credit score does not improve, you could be stuck in a high-rate loan for much longer than two or three years.”

With a balloon mortgage, borrowers get lower payments and interest rates for a fixed amount of time, and then are required to pay off the remaining balance in a lump sum.

“Pro: Save on mortgage costs initially – a great option if you don’t plan on living in the home long and Con: Plans sometimes change. If yours do, you will have to pay off or refinance the balance, which takes time, effort and more closing costs.”

An assumable mortgage is not very common and it enables the borrower to give the loan to a buyer instead of paying it off. “Pro: Reduces monthly payments and saves money on closing costs and Con: Sellers charge more for houses, so buyers need more cash to cover the difference between asking price and loan balance.”

The last two types of financing options discussed are construction loans and seller financing. These two items are different because they are not really “mortgages” in the sense discussed in the previous examples.

Construction loans are different from these other types of mortgages because they help people build a house instead of purchase an existing home.

“They typically feature a two-step borrowing process. Borrowers pay higher rates for the duration of construction, during which time they draw money to pay their builders, paying only interest on the outstanding amount. Then, they go through a second closing at which time the loan usually converts to a traditional, long-term fixed-rate structure.”

Seller financing is pretty self explanatory in that the seller of the home provides financing to the buyer.

“The buyer makes monthly payments to the seller instead of the bank. The promissory note is secured by the property. This type of financing often includes an assumable mortgage.”

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