Home equity loans
Other loan types
A loan that has a loan balance at the end of the loan term is a partially amortized, or balloon, loan. The monthly payments of principal and interest are not enough to fully repay the loan amount. A final payment (the balloon payment) is necessary to retire the loan. Florida requires a mortgage with such a loan to be clearly identified on the face of the mortgage, with the balloon payment amount specified.
If a loan is amortized in the way it would be for a regular amortized loan with twelve monthly payments per year, but payments are scheduled to be made twice per month (biweekly) instead of once, the result is that the equivalent of an extra monthly payment is made each year. This is because there are 52 weeks in a year, which means 26 biweekly payments, which equals 13 months. With this arrangement, the borrower pays off the loan more quickly and saves substantial interest.
A package loan finances the purchase of real estate and personal property. For example, a package loan might finance a furnished condominium, complete with all fixtures and decor.
Home equity loans
The ostensible purpose of this type of loan is to obtain funds for home improvement. Structurally, the home equity loan is a junior mortgage secured by the homeowner’s equity. For some lenders, the maximum home equity loan amount is based on the difference between the property’s appraised value and the maximum loan-to-value ratio the lender allows on the property, inclusive of all existing mortgage loans. Thus if a home is appraised at $500,000 and the lender’s maximum LTV is 80%, the lender will lend a total of $400,000. If the owner’s existing mortgage balance is $325,000, the owner would qualify for a $75,000 home equity loan.
With a purchase money mortgage, the borrower gives a mortgage and note to the seller to finance some or all of the purchase price of the property. The seller in this case is said to “take back” a note, or to “carry paper,” on the property. Purchase money mortgages may be either senior or junior liens.
In a reverse annuity mortgage, a homeowner pledges the equity in the home as security for a loan which is paid out in regular monthly amounts over the term of the loan. The homeowner, in effect, is able to convert the equity to cash without losing ownership and possession.
Other loan types
Senior and junior loans. When there are multiple loans on a single property, there is an order of priority in the liens which the mortgages create. The first, or senior, loan generally has priority over any subsequent loans. Second loans are riskier than first loans because the senior lender will be satisfied first in case of default. Therefore, interest rates on second mortgages are generally higher than on first mortgages.
Fixed and graduated payment loans. Loans may have variable payment amounts over the term of the loan, or a single fixed payment amount. With a graduated payment mortgage, the payments at the beginning of the loan term are not sufficient to amortize the loan fully, and unpaid interest is added to the principal balance. Payments are later adjusted to a level that will fully amortize the loan’s increased balance over the remaining loan term.
Interest-only loan. In an interest-only loan, periodic payments over the loan term apply only to interest owed, not to principal. At the end of the term, the full balance must be paid off in a lump-sum, “balloon” payment. Since these loans have no periodic principal payback, their monthly payments are smaller than amortizing loans for the same amount at the same rate of interest.
Buydown loan. A buydown loan entails a prepayment of interest on a loan. The prepayment effectively lowers the interest rate and the periodic payments for the borrower. Buydowns typically occur in a circumstance where a builder wants to market a new development to a buyer who cannot quite qualify for the necessary loan at market rates. By “buying down” a borrower’s mortgage, a builder enables the borrower to obtain the loan. The builder may then pass the costs of the buydown through to the buyer in the form of a higher purchase price.
Construction loan. A construction loan finances construction of improvements. This type of loan is paid out by the lender in installments linked to stages of the construction process. The loan is usually interest-only, and the borrower makes periodic payments based on the amount disbursed so far. As short-term, high-risk financing, the interest rates are usually higher than those for long-term financing. The borrower is expected to find permanent (“take out”) financing elsewhere to pay off the temporary loan when construction is complete.
Bridge loan. A bridge, or gap, loan is used to cover a gap in financing between short-term construction financing and long-term permanent financing. For instance, a developer may have difficulty finding a long-term lender to take out the construction lender. However, as the construction loan is expensive and must be paid off as soon as possible, the developer may find an interim lender who will pay off the construction loan but not agree to a long-term loan.
Participation loan. In a participation loan, the lender participates in the income and/or equity of the property, in return for giving the borrower more favorable loan terms than would otherwise be justified. For instance, the borrower makes smaller periodic payments than the interest rate and loan amount require, and the lender makes up the difference by receiving some of the property’s income. This type of loan usually involves an income property.
Permanent (take-out) loan. A permanent loan is a long-term loan that “takes out” a construction or short-term lender. The long-term lender pays off the balance on the construction loan when the project is completed, leaving the borrower with a long-term loan under more favorable terms than the construction loan offered.