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Understanding the Various Mortgage Products & Types of Lenders


If you are considering a real estate purchase, among the first issues that will need to be addressed is financing. A wide variety of mortgage options are available in the financial market today, making it very necessary for consumers to educate themselves on the differences between them in order to secure the best possible loan for their circumstances.
Basic Home Mortgage Categories
Among the most popular home financing options is the traditional fixed rate mortgage, or FRM. This is the loan of choice in nearly 70 percent of home purchase transactions. The characteristic of fixed rate mortgages that makes them most appealing to many consumers is stability. The interest rate of this loan is locked in at origination and remains the same throughout the term of the loan, regardless of changes in the prevailing market rate. This allows the consumer to rely upon a stable monthly payment on the principle and interest throughout the term of the loan, whether it spans 30 years or 15.
Adjustable rate mortgages, or ARMs, are another option that has become quite popular in real estate transactions. These loans have an interest rate that is tied to an index, changing with prevailing market rates. Generally, certain intervals at which the interest rates are adjusted are specified in the loan contract. If the prevailing market rate has increased from one adjustment period to the next, the monthly loan payments will rise. If interest rates have fallen, so too will the consumers payment. Often, there are caps placed on the amount that the rate can change during each adjustment period, and some carry a lifetime cap, limiting the amount rates can be increased over the term of the loan.
Under the umbrella of the two main categories of home loans, fixed rate and adjustable, are a number of variations, some of them combining characteristics of both. A few of the most common variations are outlined below.
Government Guaranteed Mortgage Loans
The FHA loan is a fixed rate mortgage that is designed especially for the first time home buyer of moderate or low income. Guaranteed by the Federal Housing Administration, these loans can be easier to qualify for than a traditional FRM and allow a smaller down payment than most other home loans, generally about 3 percent. Interest rate are usually lower than standard fixed rate loans, and programs are available for the purchase of single family homes or multi family ones, as long as they are to be owner occupied.
VA loans are another government guaranteed mortgage. To be eligible for a VA loan, one must have a history of active military service or be the surviving spouse of an active service member. Often, a veteran can obtain a VA loan with little or no down payment, but must demonstrate the ability to make monthly payments.
The USDA Rural Development Guaranteed Housing Loan is another government guaranteed home loan option. This type of home mortgage loan is provided to low and moderate income individuals who are purchasing a home in an area designated as a Rural Development eligible area. No down payment or mortgage insurance is required with this loan program, and qualification can be much easier than your average home loan, allowing consumers with less than perfect credit to obtain financing for home purchases.
Option ARMs
Also referred to as flexible payment ARMs, Option adjustable rate loans have an interest rate that adjusts every month with no adjustment caps. These loans allow borrowers to make very low mortgage payments initially, but these monthly payments will rise over time, often quite steeply.
Balloon Mortgages
Balloon mortgages are structured with a payment schedule similar to that of a thirty year fixed rate loan, although the term of the balloon loan is shorter, most often spanning five to seven years. At the end of the loan term, the outstanding balance must be paid in one lump sum, either out of pocket or by refinancing the home.
Interest Only Mortgages
Interest only mortgages are loans that allow the borrower to pay only the interest on the loan for a predetermined period of time. The principle of the loan is not paid down during this period at all, leaving the homeowner a lower monthly payment to meet over the short term. However, once this initial interest only period expires the payments increase to include repayment of the principle and are steeper than a standard loan, as the principle must be paid over a shorter time period. The longer the interest only period, the higher the payments will rise after its expiration.
Biweekly Mortgages
Biweekly mortgages are loans in which the borrower makes payments every two weeks instead of the typical monthly payment arrangement. The result of this practice is a slightly shorter repayment term. Paying biweekly results in 26 payments a year, which is equivalent to thirteen monthly payments, rather than the twelve payments made with a standard monthly mortgage payment.
Bimonthly Mortgages
Bimonthly mortgage plans do not require any extra payments, but save slightly on interest by advancing the payment by half the month. On average, these types of arrangements only shorten the loan term by approximately one month on a thirty year mortgage.
While each option may prove itself best for a segment of loan seeking consumers, none will be a perfect fit for everyone. Depending upon personal finances, the length of time one intends to reside in the home to be purchased, and many other factors, the perfect home loan option will vary widely from one consumer to another.
Useful Resources:
USDA Rural Development
100 Questions and Answers About Buying a Home
Ginnie Mae-Your Path to Home Ownership
One of the most confusing parts of the mortgage process can be figuring out all the different kinds of lenders that deal in home loans and refinancing. There are direct lenders, retail lenders, mortgage brokers, portfolio lenders, correspondent lenders, wholesale lenders and others.
Many borrowers simply head right into the process and look for what appear to be reasonable terms without worrying about what kind of lender they'™re dealing with. But if you want to be sure of getting the best deal, or are looking for a jumbo loan or have other special circumstances to address, understanding the different types of lenders involved can be a big help.
Explanations of some of the main types are provided below. These are not necessarily mutually exclusive - there is a fair amount of overlap among the various categories. For example, most portfolio lenders tend to be direct lenders as well. And many lenders are involved in more than one type of lending such as a large bank that has both wholesale and retail lending operations.
Mortgage Lenders vs. Mortgage Brokers
Mortgage lenders are exactly that, the lenders that actually make the loan and provide the money used to buy a home or refinance an existing mortgage. They have certain criteria you have to meet in terms of creditworthiness and financial resources in order to qualify for a loan, and set their mortgage interest rates and other loan terms accordingly.
Mortgage brokers, on the other hand, don't actually make loans. What they do is work with multiple lenders to find the one that will offer you the best rate and terms. When you take out the loan, you'™re borrowing from the lender, not the broker, who simply acts as an agent.
Often, these are wholesale lenders (see below) who discount the rates they offer through brokers compared to what you'™d get if you approached them directly as a retail customer. However, the broker then tacks on his or her own fee, which may equal the discount  where the customer usually saves money is by getting the best deal relative to other lenders.
Wholesale and Retail Lenders
Wholesale lenders are banks or other institutions that do not deal directly with consumers, but offer their loans through third parties such as mortgage brokers, credit unions, other banks, etc. Often, these are large banks that also have retail operations that work with consumers directly. Many large banks, such as Bank of America and Wells Fargo, have both wholesale and retail operations.
In this type of lending, the wholesale lender is the one that is actually making the loan and whose name typically appears on loan documents. The third party  bank, credit union, or mortgage broker  in most cases is simply acting as an agent in return for a fee.
Retail lenders are exactly what they sound like, lenders who issue mortgages directly to individual consumers. They may either lend their own money or may act as an agent for Again, retail lending may simply be one function offered by a larger financial, which may also offer commercial, institutional and wholesale lending, as well as a range of other financial services.
Warehouse Lenders
Somewhat similar to wholesale lenders are warehouse lenders. The key difference here is that, instead of providing loans through intermediaries, they lend money to banks or other mortgage lenders with which to issue their own loans, on their own terms. The warehouse lender is repaid when the mortgage lender sells the loan to investors.
Mortgage Bankers
Another distinction is between portfolio lenders and mortgage bankers. The vast majority of U.S. mortgage lenders are mortgage bankers, who don't lend their own money, but borrow funds at short-term rates from warehouse lenders (see above) to cover the mortgages they issue. Once the mortgage is made, they sell it to investors and repay the short-term note. Those mortgages are usually sold through Fannie Mae and Freddie Mac, which allows those agencies to set the minimum underwriting standards for most mortgages issue in the United States.
Portfolio Lenders
Portfolio lenders, on the other hand, use their own money when making home loans, which they typically maintain on their own books, or  œportfolio. Because they don'™t have to satisfy the demands of outside investors, they can set their own terms for the loans they issue.
This makes portfolio lenders a good choice for niche borrowers who don'™t fit the typical lender profile“ perhaps because they'™re seeking a jumbo loan, are considering a unique property, have flawed credit but strong finances, or may be looking at investment property. You may pay higher rates for this service, but not always because portfolio lenders tend to be very careful who they lend to, their rates are sometimes quite low.
Hard Money Lenders
If you can't qualify through a portfolio lender, a hard money lender may be your option of last resort. Hard money lenders tend to be private individuals with money to lend, though they may be set up as business operations. Interest rates tend to be quite high“ 12 percent is not uncommon“ and down payments may be 30 percent and above. Hard money lenders are typically used for short-term loans that are expected to be repaid quickly, such as for investment property, rather than long-term amortizing loans for a home purchase.
Direct Lenders
Another term you may encounter is direct lender. A direct lender simply means a lender that originates its own loans “ either with its own funds or borrowed funds. It can therefore be either a mortgage banker or portfolio lender. It does not, therefore, act as an agent for a wholesale lender. Direct lenders are inevitably retail lenders as well, because they do not involve third parties or middlemen in making loans to consumers.
Correspondent Lenders
A final term you may hear is œcorrespondent lender. Whereas some types of lenders are distinguished by the process leading up to the loan, correspondent lenders are defined by what happens after the loan is issued. Correspondent lenders work with an investor, called a sponsor, who purchases any mortgages they make that meet certain criteria. Often, this is either Fannie Mae or Freddie Mac, in their roles as the major U.S. secondary lenders.
Correspondent lenders earn their money by collecting a point or two when the mortgage is issued. Immediately selling the loan to a sponsor pretty much guarantees they'™ll make money, since the correspondent no longer carries the risk for a default. However, the sponsor may decline the loan if it turns out not to meet the sponsor's standards, in which case the correspondent must either find another investor or carry the loan itself.
Again, these terms are not always exclusive, but instead generally describe types of mortgage functions that various lenders may perform, sometimes at the same time. But understanding what each of these does can be a great help in understanding how the mortgage process works and form a basis for evaluating mortgage offers.
By: Peter King, and Sharon Secor,