|
Choosing the right loan program is arguably the most critical step to obtaining the right home loan. Interest rates and closing cost are certainly important, however, a seemingly great low-rate low-cost loan may turn out to be a disaster should it have a short fixed rate term, or a prepayment penalty. Learn more about today’s innovative loan programs.
Conforming Loan
Loan amounts less than or equal to $417,000 in most states for the year 2006, some states vary. The conforming loan limits adjustments are based on the October-to-October changes in the mean (average) home price, as published by the Federal Housing Finance Board (FHFB). The FHFB figures come from its monthly survey of lenders. Both new and existing homes are included in the survey . Freddie Mac provides a bridge between from homeowners and renters to the world’s investment capital markets. It is a unique mortgage credit system that makes homeownership a reality for more of America’s families. Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) guidelines. Both institutions are government subsidized and are charged with the purpose of keeping interest rates low and homes affordable.
Non-Conforming (Jumbo)
For the calendar years 2006 and 2007 a mortgage loan amount over $417,000. Non-conforming loans exceed the limits set by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). Both institutions are government subsidized and are charged with the purpose of keeping interest rates low and home ownership affordable. Non conforming loans have differing restrictions from that of conforming loans and many times carry a higher interest rate.
Fixed Rate Mortgage Products:
Loans are fixed for the life of the loan. Loan divides up equal principal and interest rates charges over the life of the loan to provide a predictable schedule of loan repayment. Equal interest and principal payment distribution is referred to as loan amortization.
Fixed rates loan can be an optimal strategy for many clients but are no longer the only choice to be considered. Fixed rate loans are great if you plan to live in your home for a long period of time, don’t see yourself needing cash for a remodel, prefer the security, or like the rate you have obtained and don’t see yourself selling or refinancing anytime soon.
Fixed rate loans can be obtained in denominations of 50, 40, 30, 20, and 15 year periods
30 Year Fixed Mortgage
Traditionally offers the lowest monthly payment of traditional fixed mortgages. In recent years new 40 and 50 year fixed mortgages have started to become available, but are not a common choice due to higher relative rates in comparison to other fixed rate mortgages. Keeps home loan payments affordable by spreading them out over 30 years and maintains maximum tax deductible when compared to shorter period fixed mortgages.
20 Year Fixed Mortgage
Helps clients pay off their homes faster and build equity at a more rapid pace that the 30 year fixed. Typically has a lower rate than 30 year fixed mortgages but higher monthly payments. A 20 Year Fixed will save clients considerable interest charges over the life of the loan due to shorter amortization period and lower interest rates.
15 Year Fixed Mortgage
Has higher payments than the 30 and 20 year fixed mortgages but typically has a lower interest rate in comparison. Saves even more money on loan interest when compared to a 20 year fixed mortgage and builds equity at an even more rapid pace.
Adjustable Rate Mortgage (ARM) Products:
What is an Adjustable Rate Mortgage?
Fixed rate mortgages offer a rate that is fixed for the life of the loan and will not have an adjustment period. Adjustable Rate Mortgages or ARMs are loan programs that have rates and terms fixed for a period of time followed by a period of adjustment. The Subsequent rate changes and of an ARM are typically tied to a given financial index (i.e. MTA, Libor, Prime Rate or COFI). Payments and terms of these loans will adjust according to their individual features.
Banks generally charge less for ARM loan programs in contrast to fixed loan programs due to the higher associated risk. This may make payments lower for a given period and may help buyers qualify for a loan they might not have otherwise qualified for. ARMs can be less expensive over time, but there is no guarantee how the market will affect ARM adjustments.
When considering an ARM program buyers must weigh the associated risk compared to the benefit of lower payments and their overall financial plan. We suggest clients speak in depth with their mortgage consultant about their unique financial situation prior to choosing an ARM loan.
Basic ARM Features
ARM Adjustment Period
Most ARMs have interest rates that may adjust by 1, 3, 5, 7 or 10 years. Additionally there are also ARM programs that have adjustment periods for varying amounts of time, either 1 month or every 6 months. For example a 10 year ARM has an interest rate fixed for 10 years and will adjust subsequent periods there after depending specific loan features.
Financial Index
Most banks tie their ARM programs to a specific financial index which will dictate rate fluctuations. These indices are based on open market investment and can drive the direction of a loan holder’s interest rate thereby changing their monthly payments. Different indices have varying levels of volatility, and are tied to different types of securities investments. The more common indices are tied to treasury securities.
When selecting an ARM program clients are advised to query their loan consultant on the specific index their loan will be tied to.
ARM program Examples
Hybrid ARMs Provide a low initial rate with security of a fixed payment for 3, 5, 7, or 10 years before the loan converts to an adjustable rate mortgage. After the initial fixed period, rate adjustments are annual, or ever 6 months depending on the loan adjustment period. For instance a 5/1 ARM would make adjustments once a year in the adjustment phase, versus a 5/6 which would adjust ever 6 months during the adjustment phase.
Details applicable to Interest Only Hybrid ARMs as well as traditional Hybrid ARMs, will characterize each mortgage origination.
1-Mo / 6-Mo Interest Only LIBOR ARMs
The Interest Only LIBOR ARM is an adjustable rate mortgage with Interest Only payments, lower than typical ARM margins, and no periodic rate caps.
Borrowers pay interest only usually for the first ten years of the loan. The loan will then be fully amortized over the remaining term. These loan products have no negative amortization.
*Some state restrictions will apply with these loan programs, check with your mortgage consultant for details
First Position Equity Line of Credit
First Position Equity Lines of Credit are 1st mortgage liens that offer borrowers interest only payments as well as Flexible payment options. No PMI is required for LTV’s above 80%. The product can be positioned to show Borrowers how they can access paid down principal using convenience checks and an access card. In addition, it can be positioned as a single loan with a built-in HELOC draw capability.
1 Yr. ARM
A 1 Yr. ARM is an adjustable rate mortgage with fully amortizing payments. Initial interest rates are less than fully indexed and adjust every year.
1 Yr. ARM allows for a conversion option. If the customer selects this option, they may convert their ARM loan to a fixed rate loan during the "Conversion Date”.
6 Month ARM
The 6 month ARM is an adjustable rate mortgage with fully amortizing payments. Initial interest rates are less than fully indexed and adjust every six months.
Pay Option ARM or Pick a Pay
The Pay Option program offers borrowers’ significant payment flexibilities with a low initial minimum payment and up to three additional payment options, as long as payment options are greater than the minimum payment required.
The initial payment or subsequent minimum payments may be less than the amount of interest due on the loan; therefore the potential for negative amortization / deferred interest exists. The customer may elect to pay more than the minimum payment to eliminate deferred interest.
|
