When buying a home, most home buyers take out a conventional mortgage loan. Mortgage loans are designed for the large majority of people who wish to become home owners, but don’t own enough money to make a home purchase with cash. A large amount of money is still needed initially for the down payment and various fees and closing costs (Read: Assessing Your Current Financial Situation: Are You Ready for a Home?).
Besides conventional mortgage loans, buyers with specific needs are still able to find niche mortgage loans, which have advantages and disadvantages over other mortgage loans. Depending on what you are looking for, a niche mortgage loan might be a better fit for your needs than a conventional mortgage loan. Niche mortgages can accommodate home buyers who are looking for a mortgage that will help them make their home more energy efficient, or buy a home that is within walking distance of their workplace, allowing the borrower to take out a larger loan. Borrowers with low credit scores, who are not able to qualify for a conventional mortgage can also take advantage of a type of niche mortgage loan, which was designed especially for them.
The Energy Efficient Mortgage
Homes that are energy efficient allow their owners to spend less on utility bills each month, allowing them to take out larger mortgage loans. Energy Efficient Mortgages help owners make their homes more energy efficient, but are not second mortgage0s (Read: Need a Second Mortgage? A Home Equity Line of Credit Could Be the Answer!). When buying a home, you have the possibility of adding an Energy Efficient Mortgage, which will pay for the energy efficient upgrades to your regular mortgage. The two mortgages will be rolled into one, but you won’t have to meet any qualification guidelines or make a down payment for an Energy Efficient Mortgage.
If you plan on refinancing your mortgage and want to upgrade your home to be more energy efficient, you can get the Energy Efficient Mortgage to be rolled into the new mortgage loan. Also, if the home that you are buying already has energy efficient upgrades, lenders will allow you to take out a larger mortgage loan because your monthly utility bills will be lower.
An Energy Efficient Mortgage can be used to purchase home upgrades such as a new heating and air conditioning unit, better insulation, solar panels and many more. There are three types of Energy Efficient Mortgages:
- Conventional Energy Efficient Mortgage. Offered by most lenders, whose loans are backed by Fannie Mae and Freddie Mac, the conventional Energy Efficient Mortgage allows you to borrow up to 15 percent of your home value for energy efficient improvements.
- FHA Energy Efficient Mortgage. With this type of Energy Efficient Mortgage you will only be able to borrow up to 5 percent of your home’s value, but the mortgage will be insured by the Federal housing Administration (FHA).
- VA Energy Efficient Mortgage. Backed by the U.S. Department of Veterans Affairs, the VA Energy Efficient Mortgage allows present and ex-military members to borrow up to $6,000 for energy efficient upgrades for their homes.
The Location Efficient Mortgage
When buying a home that is within walking distance of stores, shopping centers, public transit, or your workplace, lenders consider that you will spend less money on your commute, and allow you to take out larger mortgage loans (Read: Securing the Best Mortgage Rates). The Location Efficient Mortgage was designed in order to stimulate the development of more efficient communities and reduce people’s dependence on cars.
Borrowers that wish to buy a home in an urban community are allowed to borrow a larger amount, therefore buying a bigger or better home. By doing this, Location Efficient Mortgages reduce fuel consumption, preserve open space by decreasing the need for roads, and lower air pollution, which is a problem in most large cities.
The Subprime Mortgage
The subprime mortgage is a type of niche mortgage that is designed to help people with low credit scores, usually below 600 and who would otherwise be unable to qualify for a mortgage loan, become home owners. Subprime mortgages put lenders at risk, so the interest rates on these mortgages will be much higher than on conventional mortgages offered to people with good credit scores.
Most subprime mortgages are adjustable-rate, which means that the borrower will initially pay a lower interest rate for a predetermined period of time, but a larger interest rate after that period is over (Read: Fixed Rate vs. Adjustable Rate Mortgages). Many lenders, in order to increase their profits, started giving subprime mortgages very easily back in 2004, which led to a high rate of foreclosures and large financial problems for lenders.
Niche mortgages can save you money or help you become a home owner if you don’t qualify for conventional mortgages. However, these mortgages also come with disadvantages which may cause you to lose money or end up losing your home, so carefully assess your financial situation and options before taking out any type of mortgage (Read: The Reality of Being a Home Owner: It Costs How Much?!).