Variations of Mortgages…
You’ll spend more on your primary mortgage than you ever will on your house. Consider that your house is probably the largest purchase that you will ever make. Doesn’t it make sense to choose the first mortgage carefully?
An overview of different types of home loans follows. One point to remember before reading further - It’s not just the interest rate to consider in making your decision about home loans. It is a factor, however, a professional mortgage broker will provide guidance on the right type of loan to meet your financial goals.
Adjustable rate mortgages, or as they are known in the trade, ARMs, have some advantages and some disadvantages. See our section on Understanding Mortgages to assist you in making the right choice, or contact us today to discuss the best options for your needs.
Fixed- rate mortgage
Fixed-rate loans dominate the market more than ever right now, and for good reason: They’re cheaper than they have been in three decades. The percentage difference between variable-rate and fixed-rate home loans has narrowed and the spread usually isn’t enough to justify giving up all those years of fixed-rate security.
Long-term, fixed-rate home loans are good for people who can comfortably qualify for the loan they want and expect to stay I their homes for many years. But how long do you pay? Many baby boomers are now refinancing mortgages with 15-year, fixed-rate loans assuming that they’ll make their last payments by retirement.
For example, if you borrow $ 150,000, you could pay it off at 5.875% in 30 years at $ 887.31 a month. Or you could borrow the same amount at 5.65% for 15 years and pay $ 1,237.60 a month.
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Adjustable-rate mortgage
Borrowers who are willing to sacrifice the long-term security of a fixed-rate loan can get a lower interest rate and start with lower payments if they take an adjustable-rate mortgage (ARM) as their first mortgage . That’s a benefit for two types of borrowers: those who expect to move within five years and those who may want the lower rate to help them qualify for the loan that puts them in the house of their dreams.
ARM borrowers, however, sacrifice simplicity. The interest rates on these primary mortgages rise and fall along with market interest rates and, if you’re not careful, you can find your monthly payment rising higher than your ability to afford it. Several variables determine whether an ARM is a good deal. Here are the most important:
- Your index: Interest rates on ARMS are linked to several common money-related indexes that lenders use. Most common is the rate on one-year Treasury securities, but many mortgage lenders offer their customers two popular options: 1) the often-lower but more volatile London InterBank Offering Rate (LIBOR) and 2) the slightly higher but less volatile Cost of Funds Index for Western banks in the Federal Reserve Bank’s 11th District. The Wall Street Journal prints most of these rates; ask your broker more about these options. There’s no clear-cut winner; choose the index that offers you the best rate with the least volatility. You might have to accept a little more volatility if you want the lowest rate.
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Your frequency: How soon and how often will your rate adjust? If you expect rates to rise, you’d rather have a slower adjustment period and a longer stretch of time before it starts adjusting. Most common today are ARMs that adjust every year; you can also find those that adjust every three or even every five years.
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Your rate cap: Most ARMs carry limits on how high their rates can be adjusted at any one time, and on how high they can go overall. To evaluate an ARM, assume skyrocketing interest rates. Make sure you can afford the bad news. A typical structure today includes a 2-percentage point cap on annual increases, with a 6-percentage point cap over the life of the loan. If you start with a 6%, for example, it could go up in 2% increments to 8%, 10% and 12%. Once it hits 12%, it could not go any higher. Of course, that rate would be high enough to double your interest payment.
Home Loan Variations
What if you have a steady income but little down-payment cash? Enter Fannie Mae, the nation’s largest source of home mortgage funds. It buys mortgage loans and creates new products designed to keep money flowing into the mortgage market.
Fannie Mae’s “Flexible 97” mortgage allows borrowers to limit their down-payment to 3% of the cost of their home, and – contrary to most lending plans – to get that 3% as a gift from parents, employers, or other family members. Flex97 is just one of many loans on the market today aimed at putting buyers into homes. Borrowers who have cash flow but little or no savings, savings but no cash flow, poor credit ratings, and other special situations can find their own best mortgages by checking the following types of loans. Mortgage brokers are expert at advising you in this regard and can find the best loan for your situation.
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Balloon mortgages: These loans often carry monthly payments as low as those of 3-year mortgages. But they’ll usually come due for payoff in five or seven years. These can be great loans for homeowners who know they won’t be staying put, but who like the certainty of a fixed rate. They’re risky for someone who stays in a home beyond the term of the loan, because then the homeowner will need to find a replacement mortgage, move, or make that big balloon payment.
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Hybrids: When you cross a balloon mortgage with a fixed or adjustable-rate mortgage, you get a hybrid. These loans stay fixed for five or seven years, then convert to either a fixed-rate or variable-rate mortgage. They have lower rates than fixed-rate mortgages, but they carry the risk of having the last 25 years of the loan being an unknown. Again, they’re good for people who like fixed payments, who need wiggle room on the rate to qualify for the loan, or who expect to move before the fixed part of the loan expires.
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Low-doc and no-doc: “Doc” refers to the documentation. If you’re self-employed or have a complicated financial situation, you might shoot for one of these loans, especially if you’re in a hurry to get into a particular house or if your income is rising rapidly. Instead of asking for tax returns, business statements, and other paperwork a borrower might be expected to provide, low-doc lenders are willing to make the loan fast and easy. But it comes at a price – maybe one-half percent more, or even a full percentage point. These loans are for borrowers with good credit ratings who are shopping for loans worth 75% or less of the home’s value and are willing to pay higher rates in exchange for quick-and-easy approval.
This sample in no way covers the multitude of mortgage programs available to home buyers. There are interest-only loans, reverse mortgages for people who want to take equity out of their homes to supplement retirement benefits, PiggyBack loans, which allow buyers to borrow the down-payment, and more. Banks don’t have access to all of the available loan programs and often restrict lending to the most credit-worthy applicants - thus the value of the Mortgage Broker.
For more information, contact or call us at 401.293.0631 for a free personal consultation.
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