Choosing the Best Loan for You
There are many types of mortgage programs available. The right type of loan for you depends upon several factors:
Your current financial picture
How you expect your finances to change
How long you intend to keep your house
How comfortable you are with the possibility your mortgage payment may change in the future
When considering loan programs, the first decision is usually if you prefer a fixed rate mortgage or adjustable rate mortgage. For example, a 15-year fixed rate mortgage can save you thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed rate mortgage, but your payments could increase when the interest rate changes.
Use this comparison table to help you determine your preference. After you decide, visit the Types of Loans section to learn more about the features and benefits of fixed rate or adjustable rate loan programs.
Types of Loans
Fixed Rate Loans—An excellent way to lock into a low interest rate for the life of your loan.The traditional fixed rate mortgage is the most common type of loan programs, where monthly principal and interest payments never change during the life of the loan. Fixed rate mortgages are available in terms ranging from 10 to 30 years and can be paid off at any time without penalty. This type of mortgage is structured, or "amortized" so that it will be completely paid off by the end of the loan term. There are also "bi-weekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)
Even though you have a fixed rate mortgage, your monthly payment may vary if you have an "impound account". In addition to the monthly loan payment, some lenders collect additional money each month (from folks who put less than 20% cash down when purchasing their home) for the prorated monthly cost of property taxes and homeowners insurance. The extra money is put in an impound account by the lender who uses it to pay the borrowers' property taxes and homeowners insurance premium when they are due. If either the property tax or the insurance happens to change, the borrower's monthly payment will be adjusted accordingly. However, the overall payments in a fixed rate mortgage are very stable and predictable.
Adjustable Rate Mortgages (ARM's)—The flexible loan, with lower initial rates and payments. Adjustable Rate Mortgages (ARM)'s are loans whose interest rate can vary during the loan's term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford and hence purchase a more expensive home. Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a "margin" plus an "index." Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI).
When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called "caps". Suppose you had a "3/1 ARM" with an initial cap of 2%, a lifetime cap of 6%, and initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%.
Some ARM loans have a conversion feature that would allow you to convert the loan from an adjustable rate to a fixed rate. There is a minimal charge to convert; however, the conversion rate is usually slightly higher than the market rate that the lender could provide you at that time by refinancing.
FHA Loans
FHA home loans are mortgage loans that are insured against default by the Federal Housing Administration (FHA). FHA loans are available for single family and multifamily homes. These home loans allow banks to continuously issue loans without much risk or capital requirements. The FHA doesn't issue loans or set interest rates, it just guarantees against default.
FHA loans allow individuals whom might not qualify for a conventional mortgage obtain a loan, specially first time home buyers. These loans offer low minimum down payments, reasonable credit expectations, and flexible income requirements.
Reverse Mortgages
Reverse Mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you retain home ownership. Reverse Mortgage works much like traditional mortgages, only in reverse. Rather than making a payment to your lender each month, the lender pays you. Unlike conventional home equity loans, most Reverse Mortgages do not require any repayment of principal, interest, or servicing fees for as long as you live in your home. Funds obtained from an Reverse Mortgage may be used for any purpose, including meeting housing expenses such as taxes, insurance, fuel, and maintenance costs.
To qualify for an Reverse Mortgage, you must own your home. The Reverse Mortgage funds may be paid to you in a lump sum, in monthly advances, through a line-of-credit, or in a combination of the three, depending on the type of Reverse Mortgage and the lender. The amount you are eligible to borrow generally is based on your age, the equity in your home, and the interest rate the lender is charging.
Because you retain title to your home with a Reverse Mortgage, you also remain responsible for taxes, repairs, and maintenance. Depending on the plan you select, your Reverse Mortgage becomes due with interest either when you permanently move, sell your home, die, or reach the end of the pre-selected loan term. The lender does not take title to your home when you die, but your heirs must pay off the loan. The debt is usually repaid by refinancing the loan into a forward mortgage (if the heirs are eligible) or by using the proceeds from the sale of your home.
Initial Fixed Rate Loan—Start with a rate generally lower than standard fixed rate loans.
30 Year Fixed Rate
Borrower Goals Loan Parameters
• Plan to live in the property over 10 years
• Like total payment stability
• Interest rate & monthly payment remain the same for 30 years
15 Year Fixed Rate
Borrower Goals Loan Parameters
• Plan on staying in property over 10-15 years
• Want to pay off property faster than 30 years
• Lower interest rate than 30 year loan
• Interest rate & monthly payment remain the same for 15 years
10/1 Year semi-fixed
Borrower Goals Loan Parameters
• Plan to live in property approximately 10 to 12 years
• Like initial payment stability, can accept interest rate change later
• Interest rate & monthly payment fixed for the first 10 years
• Starting the 11th year, interest rate adjusted every year, so payment is subject to change every year for remainder of loan
7/23 (2-Step) or '30/7 + 23'
Borrower Goals Loan Parameters
• Plan to live in property approximately 7 to 8 years
• Can tolerate one payment adjustment
• Interest rate & monthly payment fixed for the first 7 years
• Conversion option: On the 8th year, interest rate adjusted to reflect prevailing fixed interest rates, resulting payment will remain the same for remainder of loan
7/1 Year semi-fixed rate
Borrower Goals Loan Parameters
• Plan to live in property approximately 7 to 8 years
• Like initial payment stability, can accept change later
• Interest rate & monthly payment fixed for the first 7 years
• Starting the 8th year, interest rate adjusted every year, so payment is subject to change every year for remainder of the loan
5/25 (2-Step) or '30/5 + 25'
Borrower Goals Loan Parameters
• Plan to live in property approximately 5 to 6 years
• Can tolerate one payment adjustment
• Interest rate & monthly payment remain fixed for the first 5 years
• Conversion option: On the 6th year, interest rate adjusted to reflect prevailing fixed interest rates, resulting payment will remain the same for remainder of loan
5/5 & 5/1 Year semi-fixed rate
Borrower Goals Loan Parameters
• Plan to live in property approximately 5 to 6 years
• Like initial payment stability, can accept later changes
• Interest rate & monthly payment remain fixed for the first 5 years
• Starting the 6th year, interest rate adjusted every 5 years(for 5/5 ARM) and every year (for 5/1 ARM)
3/3 & 3/1 Year semi-fixed
Borrower Goals Loan Parameters
• Plan to live in property 3 years or less
• Like initial payment stability, can accept later changes
• Interest rate & monthly payment remain fixed for the first 3 years
• Starting 4th year, interest rate adjusted every 3 years (for 3/3 ARM) and every year (for 3/1 ARM)
Adjustable rate loans
Borrower Goals Loan Parameters
• Want to take advantage of lowest rate possible
• Are willing to accept yearly payment changes OR
• Cannot qualify at higher rate programs
• Interest rate adjusted every year, so monthly payment is subject to change every year for entire 30 year loan term
• Potential higher payments (at maximum interest rate)
Restrictions apply. Please contact this office for details. Call 1.888.497.2929
