Loan Type Sheet

Adjustable Rate

This is a loan where the interest rate is based on an economic index (e.g., the Consumer Price Index) and is adjusted
on a periodic basis, such as annually. The interest rate is calculated by adding a specified number of percentage
points, called the margin, to the associated index. The margin is constant throughout the life of the mortgage.

Adjustable rate mortgages also have limits, or caps, on how much the interest rate can rise from the current rate
when it’s adjusted. The first interest rate adjustment (for example, after the first year) has an initial cap that limits
the amount the interest can go up at that time. At subsequent adjustment dates, the periodic cap (also known as
subsequent cap or period cap) limits the amount the rate can adjust. There’s also a lifetime cap, which is the
maximum amount the interest rate can rise from the initial rate through the life of the loan. The mortgage’s interest
cap structure is usually expressed in numbers as something like 2/2/5 (the initial, periodic, and lifetime caps).

Example

A loan has a margin of 2% and is based on an index, which is at 3%. The loan’s initial interest rate is 5%. The
loan’s cap structure is 2/2/5. At the first adjustment, the index is at 4%, so the new interest rate is 6%. This is a 1%
adjustment, below the initial cap of 2%. At the next adjustment, the index is at 8%, which would put the new rate at
10%. This is more than the periodic cap of 2%, so the adjustment is set at the capped rate of 2% more than the
previous rate, making it 8%. Since the lifetime cap of the loan is 5%, at no time may the loan’s interest rate rise
above 10% (5% more than the initial rate of 5%).

Of course, each time the interest rate is adjusted, the borrower’s payment is adjusted. Because the index may
fluctuate up or down, mortgage payments may go up or down over time.

Amortization

This is the process of paying off a loan by making periodic payments of principal and interest. Initially, most of the
payment will go toward interest, with ever-increasing amounts going toward principal until the loan is paid off. For
instance, a 30-year fixed-rate loan will be fully amortized in 30 years. In contrast, a non-amortized loan is one where
the payments go only toward interest, not to the principal. In a non-amortized loan, the principal is paid off at the
end of the loan term as a lump sum.

Balloon Payment

This is a lump sum payment, usually at the end of a loan period.

Fixed-Rate Loan

This is a loan where the principal and interest payment remains the same over the life of the loan.

Graduated Mortgage

This is a fixed-rate mortgage with payments that gradually adjust (usually upward) based on a pre- determined
schedule and amount. The initial payments are less than what would be a fully amortizing payment, which creates
negative amortization. However, this type of payment plan can make payments easier in the beginning when perhaps
income is lower.

Growing Equity Mortgage

This is a fixed-rate mortgage where the monthly payments increase over time according to a set schedule. The
interest rate remains the same, and there is no negative amortization; the first payment is a fully amortizing payment.
As the payments increase, the amount above what would be a fully amortizing payment is applied directly to the
principal balance. This reduces the life of the term and increases the interest savings for the borrower.

Pledged Account Mortgage

With this type of graduated payment mortgage, the buyer deposits funds into a savings account held by the lender.
This fund, plus any earned interest, is used to supplement mortgage payments. The purpose is to reduce payment
amounts in the early years.

Straight-Line Mortgage (Constant Amortization)

With this type of mortgage, the amount applied to principal remains constant over the life of the loan. Each payment
becomes lower as the loan balance is reduced with each payment.

Straight Mortgage/Term Mortgage (Interest Only)

This is a mortgage in which the periodic payments go to interest only and the entire principal amount is due at the
end of the term

Home Equity Loan

This is a loan in which the borrower’s home equity is used as collateral. If the property is owned free and clear, the
home equity loan is a first mortgage. If not, it is a second or junior mortgage. Rates on home equity loans tend to be
higher than conventional loans, and their term rates shorter.

Reverse Mortgage

Also called a reverse annuity mortgage, this loan is made using the equity in the property, but the homeowner
continues living in the home while the lender makes payments to the homeowner and gains corresponding
ownership of the property over time. When the homeowner leaves the home, the lender sells the property to pay
back the amount of the loan and interest. This is designed for older homeowners who want to use the equity in their
homes to stay in their homes.

Bridge Loan

Also known as a swing loan, this is a temporary (for example, 90-day) loan that provides funds for a homebuyer to
use as a down payment for a new home, prior to selling the current home. A bridge loan is more expensive than an
equity loan, but often doesn’t require repayment of principal for a few months. It’s somewhat risky since the
homeowner could be paying for a mortgage on the new home, the mortgage on the old home (until it sells), and the
bridge loan all at the same time. A bridge loan is best used when the buyer’s current home is already under contract.

Purchase Money Mortgage

This is a form of seller financing in which a mortgage is given by the buyer to the seller toward the purchase price.
Buyers use this as down payment financing. The seller is the mortgagee and the buyer is the mortgagor. The
purchase money mortgage may be a first mortgage, a junior mortgage, or a junior wrap-around mortgage.

Wrap-Around Mortgage
This is a form of seller financing in which the seller’s mortgage remains in place, but the seller is receiving
payments from the new buyer and therefore financing the purchase. The mortgage payments the buyer makes are
expected to be higher than the payments on the seller’s original loan, so the seller isn’t paying out of pocket. It’s
generally a relatively short-term arrangement (perhaps five years), made until the buyer is able to qualify for a
conventional mortgage, and will then pay off the remaining principal to the seller.

Land Contract

Also known as a contract for deed, a land installment contract, or an installment sale agreement, this is a contract
between a seller and buyer in which the seller finances the buyer’s purchase by retaining the deed to the property
while the buyer makes payments toward the purchase price. The buyer has the right of possession. Often, there is
both a down payment, and at the end of the contract, a balloon payment (which may be a result of the buyer
qualifying for a conventional loan). When the loan balance is paid in full, the seller gives the buyer title.

Construction Mortgage

This is temporary financing for construction purposes. The developer will submit plans for a proposed project, and
the lender will make a loan based on the value of the appraisal of the property and the construction plans. The entire
loan is not given at once; disbursements are made at intervals as phases of construction are completed. Upon
completion, the lender makes a final inspection, closes the construction loan, and converts the loan into permanent,
long-term financing. Construction loans involve risk for the lender (they are essentially loaning on land, air, and a
promise to build) and usually come with a higher rate.

Blanket Mortgage

This is used in commercial applications where two or more properties are pledged as security for repayment of the
loan. For example, a developer may purchase property and subdivide using a construction loan. Once the parcels are
ready for sale, the construction loan is converted to a blanket mortgage that covers all the parcels in the subdivisions.
When a parcel sells, the release clause allows that individual parcel to be removed from the developer’s loan without
initiating a due-on-sale clause, which would require the entire loan to be repaid.

Shared Equity Mortgage

This is used most often in commercial lending. The borrower agrees to the lender’s participation in the net income
from the commercial property or enterprise in order to obtain the loan. The lender may receive interest and a share
of the owner’s profits.

Package Mortgage

This is a mortgage in which personal property is included with the real property in the sale. This might be used in
the case of a furnished condominium, for instance, but it’s more commonly used in commercial real estate where
business assets are included as collateral