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Guide to Home Loans - All About types of Loans
3,5,7,10
Year Arms
These are the most widely known ARM's and almost any lender
you check with will offer a wide variety of these. The start rates are
anywhere from 0.125% to 1.50% lower than the 30 year fixed conforming rate and
are sometimes even easier to qualify for. The 3,5,7 or 10 year period in
which the initial start rate is good for allows the client to have a fixed rate
for a defined period of the mortgage term. Once this period expires the
mortgage turns into an adjustable rate with yearly maximum payment and rate
increases and usually carries a lifetime cap. The most common feature of
these mortgages is called a 2/6 cap. This means that the mortgage rate can
never rise any higher than 2% in any given year and only 6% over the entire life
of the mortgage.
These types of ARM's are great for people who usually move
within a foreseeable time period or whose job requires a lot of relocation
however long term homeowners may prefer to have the stability of a fixed rate.
To find the best type of mortgage product for you please contact a mortgage
professional by using the link below.
Teaser
Rate Mortgages
Some lenders advertise adjustable mortgages with teaser or
start rates as low as 2.95%. Is this a misprint? No, however one
must be very careful in understanding exactly what these programs are.
These programs are usually targeted towards people who have sporadic income
(i.e. self employed, independent contractors) and those who value a very low
monthly obligation. However, what every consumer should know is that most
of these programs contain negative amortization. What is negative
amortization? Simply put, it means that your monthly minimum obligation is
not meeting the full payment required to start reducing your loan amount. So if
you only pay the minimum on your monthly statement then you will gradually see
your loan balance increase over the first few years. A client should be
really thorough before accepting one of these ARM's and have a qualified
professional review the amortization schedule of the particular loan to make
sure that all future needs will be met.
One good point is that these ARM's usually offer lifetime caps lower than those
of the traditional 3,5,7 or 10 year ARM's. In fact, a certain lender
offers a lifetime cap as low as 9.45% thus if you pay the fully indexed payment
every month you may never see negative amortization, hold a fairly safe ground
against rising interest rates and still have the flexibility not to make a full
payment during those months which you need a little more cash.
Contact a mortgage professional today to see if this product is right for you by
clicking the link to the left.
Balloon
Mortgages
Balloon mortgages offer lower interest rates for shorter term financing,
usually five, seven, or ten years. At the end of this term, they require the
borrower to pay off the entire outstanding balance with a lump-sum payment.
Balloon mortgages may be right for you if you plan to sell or refinance your
home within a few years and want a fixed, low monthly payment however they are
not for everybody. The advantage they offer is an interest rate that is lower
than that of a fully amortized fixed-rate mortgage. For example, your initial
interest rate may be 7.00% with a five year balloon note when a 30 year fixed
rate is in the 8.00% range. You would pay that rate for the first five, seven,
or ten years, depending on the term of your balloon loan, then the balance would
be due in full. To contact a mortgage professional who can better assist you
please use the links to the left or the graphic below.
Adjustable
Mortgages using a First and A Second - The
80-10-10
With an 80-10-10, you get a first mortgage for 80% of the
purchase price, put 10% down and borrow the remaining 10% as a home equity line
or fixed rate second. This second loan is often referred to as a
"piggy back loan". To summarize the loan will consist of three
parts as described below.
The main advantages of this product are to
reduce or even waive your PMI liability allowing more of your money to go
towards the principal of your new home and to enable borrowers to receive higher
loan to values for their new home, or less of a down payment in other terms.
Most lenders will have fixed maximums on the money they will loan on first
mortgages but when used in conjunction with a second loan these limits can
increase by as much as 15% (otherwise known as CLTV - combined loan to value)
To be approved for an 80-10-10 you have to qualify for the payments on both the
mortgage and the piggy back loan but may save you a lot of interest over the
life of your loan.
Almost every major lender offers these types of loans so to find a lender in
your area simply click the link at the bottom of this page.
We also recommend getting a quote for both types of loans, fixed and adjustable.
You can then compare the monthly interest portions, mortgage insurance premiums
and anticipated amortization schedules to make an educated decision.
Pre-Payment penalty
Always ask if your potential loan carries a prepayment penalty. If so, how long
are they in effect for? How much is the penalty? 3 years is usually
the maximum time period for these penalties to be in force. Penalties can
range from 6 months interest to 3% of the total loan amount.
How are the
margins Determined?
After the fixed period ends, what is the margin tied to the adjustable payment.
The higher the margin, the higher your payment will be. An average margin
runs about 1.5 to 2.5 points above an index.
What index will your
new interest rate be based on?
Watch out for anything tied to the LIBOR index or private indexes of mortgage
lenders. These can be extremely high and are subject to greater
fluctuations in rate than stable indexes such as the treasury bill.
conversion to a
fixed rate?
Find out if you have an option to convert to a fixed rate during the live of the
loan. Some fees may apply but it may be well worth it if rates drop.
ARE THESE Loans
Assumable?
If a loan has this feature it may be easier to sell a home when interest rates
are high. Less and Less common these days but worth looking for.
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