Common Georgia Mortgage Types Explained
A mortgage is a security instrument that secures a promissory note. The mortgage may give the lender a lien against the property, or it may convey to the lender title over the property, depending on state law. In Georgia, as we have discussed, most mortgages convey title to the lender until the debt is paid in full. The mortgage also allows the borrower to use the property with full rights of ownership while paying off their purchase money loan. When the borrower pays off the loan, the lender gives the borrower a satisfaction of mortgage or cancellation of security deed that removes any lien from the property and conveys full title to the mortgagor.
In order to avoid the threat of foreclosure, you need to understand the type of mortgage you have, and if necessary, refinance to a better mortgage choice.
Types of Mortgages
Mortgages are commonly classified by the method of repayment. There was a time when most mortgage products looked pretty much the same, with the lender charging a fixed interest rate applied to the loan balance, or principal. However, in their vigorous competition for borrower clients, lenders have lately introduced new and innovative loan programs. Some of the basic types of home purchase loans now in use are:
- Amortized Mortgage Loans: This type of loan calls for level periodic payments to bring the balance down to zero over a specified period of time. Each scheduled payment include a reduction in principle and a payment of interest on the unpaid balance. The most common plan provides for monthly payments at a fixed rate of interest. The terms of these “conventional” loans typically run from 15 – 30 years to bring the loan balance down to zero. The amount of each payment which goes toward interest is reduced as the loan balance is reduced.
- Fully Amortized with Balloon Payment: This payment plan is similar to the conventional plan above, but the term falls short. At some predetermined time the borrower must make a balloon payment which pays off the entire remaining balance.
- Partially Amortized Loan: Again, the borrow has level payments, but the amount of the payments is less than would be needed to pay off the entire loan in the dull term. Therefore, a balloon payment will be needed at maturity.
- Unlevel Amortized Mortgage: This plan requires a fixed amount paid toward principal in each payment, plus interest on the declining balance. Therefore, each scheduled payment amount is lower than the previous payment.
- Interest-Only Mortgages: Also formerly known as Straight-Term Mortgage, your monthly mortgage payment only covers the interest you owe on the loan for the first 1 to 10 years of the loan, and you pay nothing to reduce the total amount you borrowed. After the interest-only period, you either start paying higher monthly payments that cover both the interest and principal that must be repaid over the remaining term of the loan, or you settle the entire bill with a balloon payment. The thinking behind this type of loan is that the borrower will build equity in the property, however this only occurs if the property’s value is appreciating.
- Adjustable Rate Mortgage (ARM): This plan allows the lender to adjust the interest rate based on a reliable public index. It protects the lender from a loss in profit due to a change in the market rate. That’s why a lender will generally offer this plan at a reduced initial rate, with adjustments to occur at stated intervals over the life of the loan. Changes may go up or down, and there is a federally imposed “cap” on how much change can occur at each adjustment as well as over the life of the loan.
- Negative Amortization Mortgages: Your monthly payment is less than the amount of interest you owe on the loan. The unpaid interest gets added to the loan’s principal amount, causing the total amount you owe to increase each month instead of getting smaller.
- Option Payment ARM Mortgages: This is an adjustable rate mortgage with a twist. Here you have the option to make different types of monthly payments with this mortgage. For example, you may make a minimum payment that is less than the amount needed to cover the interest and increases the total amount of your loan; an interest-only payment, or payments calculated to pay off the loan over either 30 years or 15 years.
- 40-Year Mortgages: You pay off your loan over 40 years, instead of the usual 30 years. While this reduces your monthly payment and helps you qualify to buy a home, you pay off the balance of your loan much more slowly and end up paying much more interest.
- Graduated Payment Mortgage (GPM): This is another option that provides low early payments followed by increased later payments. It was designed to make homes more affordable in the short range while assuming increased income in the long range. Because those early payment often fall short of paying even the interest amount, the principal is actually increasing, resulting in negative amortization.
- Buydown: Also known as “3-2-1 Loans”, this technique is popular with developers and builders. It makes a home immediately affordable by reducing payments in the early years, BUT it does not present the problem of negative amortization. Here, the builder offers a buydown which reduces the loan rate by 2% in the first year and 1% in the second year, with the developer paying the lender a fee to make up the difference.
- Budget Mortgage Loan: This is required on all FHA and VA loans, so that the borrower’s monthly payment includes principal and interest plus an amount to cover the monthly property tax and hazard insurance premiums. This is referred to as PITI, principle, interest, insurance and tax. These funds, called impounds, are held in escrow so the lender can pay the tx and insurance bills and protect themselves against property destruction or a tax lien, which would be superior to a mortgage lien.
In essence, every mortgage type represents a de facto lien on your property’s title until it is paid off. In the case of multiple mortgages there is an established hierarchy of liability, called lien priority, based on when the lien was filed.
Elva Branson-Lee, Georgia real estate specialist, CDPE
770-475-1130 exy 8889