Types of Loans
With a fixed rate mortgage, you know exactly what your principal and interest payment will be each month for the life of your loan. It won't change, because your interest rate doesn't change. your taxes and insurance component of your payment towards escrow can change (and probably will) if your taxes and insurance change. If interest rates go up, you're protected with a fixed rate mortgage, but you won't benefit if rates go down. You can always take advantage of falling rates by refinancing.
Fixed rate mortgages might be right for you if:
You want the security of a fixed principal and interest payment.
You think that interest rates will go up.
You are on a fixed or limited budget.
You won't be refinancing your home for 5 to 7 years.
30 Year Fixed Rate
Description: This loan carries a fixed rate and payment for 30 years.
Benefits: Your payment will not change for the duration of your loan, even if interest rates rise.
Caution: Fixed rate mortgages generally carry higher payments and rates than adjustable rate
mortgages. If interest rates fall, you will only receive a lower rate if you refinance the loan.
15 Year Fixed Rate
Description: This loan carries a fixed rate and payment for 15 years.
Benefits: Your payment will not change for the duration of your loan, even if interest rates rise. by paying off your loan over 15 years, instead of 30, you will build equity in your home at a much faster rate. 15 year loans also offer rates significantly lower than 30 year loans.
Caution: Fixed rate mortgages generally carry higher payments and rates than adjustable rate
mortgages. If interest rates fall, you will only receive a lower rate if you refinance the loan. Also, by amortizing your loan over 15 years, you are obligating yourself to a larger payment.
5 Year Balloon
Description: This loan has a fixed rate and payment for the first 5 years. After that, the remaining balance owed is due in the form of a balloon payment. The payment is based on a loan that amortizes over 30 years.
Benefits: The interest rate and payment for this loan are significantly less than a 30 year fixed rate mortgage. Also, at the end of the 5 year period, there is a conditional refinance clause that allows you to keep the loan and pay a rate determined at that time, for the remaining 25 years.
Caution: If you retain your property and do not refinance this loan within 5 years, you will be
subject to the balloon payment. In the event that you do not qualify for the conditional refinance, this balloon payment may cause a financial hardship.
7 Year Balloon
Description: This loan has a fixed rate and payment for the first 7 years. After that, the remaining balance owed is due in the form of a balloon payment. The payment is based on a loan that amortizes over 30 years.
Benefits: The interest rate and payment for this loan are significantly less than a 30 year fixed rate mortgage. Also, at the end of the 7 year period, there is a conditional refinance clause that allows you to keep the loan and pay a rate determined at that time, for the remaining 23 years.
Caution: If you retain your property and do not refinance this loan within 7 years, you will be
subject to the balloon payment. In the event that you do not qualify for the conditional refinance, this balloon payment may cause a financial hardship.
2) Adjustable Rate Mortgage (ARM)
Compared to fixed rate mortgages, Adjustable Rate Mortgages (ARMs) offer a lower interest rate to start, so your monthly payments are generally lower. But, the interest rate moves up and down with the market based on an "index". Some of the more common indices include U.S. Treasury Bills, cost of Funds Index (COFI) and the London Interbank Offered Rate (LIBOR). Most ARMs have an initial fixed rate period where the interest rate doesn't change followed by the rest of the loan's lifetime period where the rate is adjusted at predetermined intervals. Many ARMs have caps that limit how much your interest rate can change per period as well as for the life of the loan.
Also be aware that there are some very low rates ARMs that start out with "discounted" rates. These discounted rates are below the market rate and will definitely go up at the first adjustment period, but can also go down over time.
Adjustable rate mortgages might be right for you if:
You want more property than you can qualify for now with a fixed rate.
You are confident that your income will increase, or that rates will not go up much.
You plan on selling or refinancing within seven years of buying your home.
FlexPay ARM
Description: This loan offers a super-low introductory rate and payment. The interest rate adjusts monthly, but the payments are based on the introductory rate for the first year. After that, the minimum required payment will increase 7.5% per year for the next four years.
Benefits: This product gives you the flexibility of up to three different payment options to meet your monthly financial needs. Each moth your options may include a fully amortizing payment, an interest-only payment or the minimum payment, which is initially based on the low 1% introductory rate. The balance can be paid off sooner than a 30 year mortgage while saving significant amounts on interest.
Caution: Although this loan offers a low payment, the interest rate is adjustable after the
introductory term. Depending on the actual rate and your payment choice, this loan has the potential for negative amortization unless you make the minimum payments.
3/1 ARM
Description: This loan has a fixed rate and payment for the first 3 years. After that, the rate and payment adjusts annually. During the adjustable portion of the loan, the rate increase or decrease is capped each year. Also, there is a lifetime cap that sets a maximum limit for the rate over the term of the loan.
Benefits: Your rate and payment for this loan is generally less than for a fixed rate mortgage. If you anticipate rates to fall in the future, or if you intend to sell or refinance the property within 3 years, this may be a desirable loan to select.
Caution: If you retain your property and do not refinance this loan before 3 years, you are subject to the adjustable rate. Depending on the interest rate environment at that time, your rate and payment may increase significantly.
5/1 ARM
Description: This loan has a fixed rate and payment for the first 3 years. After that, the rate and payment adjusts annually. During the adjustable portion of the loan, the rate increase or decrease is capped each year. Also, there is a lifetime cap that sets a maximum limit for the rate over the term of the loan.
Benefits: Your rate and payment for this loan is generally less than for a fixed rate mortgage. If you anticipate rates to fall in the future, or if you intend to sell or refinance the property within 3 years, this may be a desirable loan to select.
Caution: If you retain your property and do not refinance this loan before 5 years, you are subject to the adjustable rate. Depending on the interest rate environment at that time, your rate and payment may increase significantly.
Interest Only 3/1 Treasury ARM
Description: This loan has a rate that is tied to the monthly average of Treasury securities index with a constant maturity of one year as published in The Wall Street Journal. It is fixed for the first 3 years, and then converts to adjustable rate loan, changing every 12 months for the remainder of the loan term.
Benefits: The 3-Year interest only ARM allows you to pay a lower interest rate than a traditional 30-year loan. Adjustable rate mortgages are among our most popular loans because they help you qualify for a larger home, maximize cash flow, there is no negative amortization and your loan may be assumable.
Caution: After the initial 3-year period, the rate will follow the movement of this index up and down, with certain limits. Once the interest-only period ends, monthly payments rise due to two factors; 1) The borrower begins to pay both principal as well as interest, and 2) The payoff period of the loan is shorter.
Interest Only 5/1 Treasury ARM
Description: This loan has a rate that is tied to the monthly average of Treasury securities index with a constant maturity of one year as published in The Wall Street Journal. It is fixed for the first 5 years, and then converts to adjustable rate loan, changing every 12 months for remainder of the loan term.
Benefits: The 5-Year interest only ARM allow you to pay a lower interest rate than a traditional 30-year loan. Interest only adjustable rate mortgages are among our most popular loans because they help you qualify for a larger home, maximize cash flow, there is no negative amortization, and your loan may be assumable.
Caution: After the initial 5-year period, the rate will follow the movement of this index up and down, with certain limits. Once the interest-only period ends, monthly payments rise due to two factors: 1) The borrower begins to pay both principal as well as interest, and 2) The payoff period of the loan is shorter.
2/6 ARM
Description: This loan has a fixed rate and payment for the first 2 years. After that, the rate and payment adjusts every 6 months. During the adjustable portion of the loan, the rate increase or decrease is capped each year. Also, there is a lifetime cap that sets a maximum limit for the rate over the term of the loan.
Benefits: Your rate and payment for this loan is generally less than for a fixed rate mortgage. If you anticipate rates to fall in the future, or if you intend to sell or refinance the property within 3 years, this may be a desirable loan to select. This product is also popular with borrowers with less than perfect credit, as it offers a relatively low rate for the first 2 years. You can use this time to rebuild your credit, so you can refinance to a lower rate after the fixed period expires.
Caution: If you retain your property and do not refinance this loan before 2 years, you are subject to the adjustable rate. Depending on the interest rate environment at that time, your rate and payment may increase significantly.
3/6
ARMDescription:This loan has a fixed rate and payment for the first 3 years. After that, the rate and payment adjust every 6 months. During the adjustable portion of the loan, the rate increase or decrease is capped at each rate change. Also, there is a lifetime cap that sets a maximum limit for the rate over the term of the loan. The adjustable rate is based on an index that adjusts plus a margin that is fixed for the life of the loan.
5/6 ARMDescription: This loan has a fixed rate and payment for the first 6 months. After that, the rate and payment adjust every 6 months. During the adjustable portion of the loan, the rate increase or decrease is capped at each rate change. Also, there is a lifetime cap that sets a maximum limit for the rate over the term of the loan. The adjustable rate is based on an index that adjusts plus a margin that is fixed for the life of the loan.
Benefits: Your initial rate and payment for this loan are significantly less than for a fixed rate mortgage. If you anticipate rates to fall in the future, or if you intend to sell or refinance the property within 6 months, of if you reel that rates will remain the same or decrease, this may be a desirable loan to select.
Caution: If you retain your property and do not refinance this loan within 6 months, you are subject to the adjustable rate. Depending on the interest rate environment at that time, your rate and payment may increase significantly.
7/6 ARMDescription: This loan has a fixed rate and payment for the first 5 years. After that, the rate and payment adjust every 6 months. During the adjustable portion of the loan, the rate increase or decrease is capped at each rate change. Also, there is a lifetime cap that sets a maximum limit for the rate over the term of the loan. The adjustable rate is based on an index that adjusts plus a margin that is fixed for the life of the loan.
Benefits: Your initial rate and payment for this loan are generally less than for a fixed rate mortgage. If you anticipate rates to fall in the future, or if you intend to sell or refinance the property within 5 years, this may be a desirable loan to select.
Caution: If you retain your property and do not refinance this loan within 5 years, you are subject to the adjustable rate. Depending on the interest rate environment at that time, your rate and payment may increase.
Description:This loan has a fixed rate and payment for the first 7 years. After that, the rate and payment adjust every 6 months. During the adjustable portion of the loan, the rate increase or decrease is capped at each rate change. Also, there is a lifetime cap that sets a maximum limit for the rate over the term of the loan. The adjustable rate is based on an index that adjusts plus a margin that is fixed for the life of the loan.
10/6
ARMDescription:This loan has a fixed rate and payment for the first 10 years. After that, the rate and payment adjust every 6 months. During the adjustable portion of the loan, the rate increase or decrease is capped at each rate change. Also, there is a lifetime cap that sets a maximum limit for the rate over the term of the loan. The adjustable rate is based on the LIBOR index plus a margin.
3) Construction
Construction loans are used to finance the building of a new home, rather than purchase an existing home. They are usually variable-rate loans that have interest only payments during the construction phase. Draws are scheduled based on the stages of construction to pay the builders.
Many construction loans are construction-to-permanent which means that when construction is complete, the loan is converted to a normal mortgage. This has the advantage of a single loan with one closing.