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| FIXED
RATE FIXED TERM |
Interest Rate |
Term |
Description |
Advantages |
Disadvantages |
Fixed |
10yr
15yr
20yr
30yr
40yr |
Most common type of loan.This loan has
an interest rate and monthly payment that remains fixed for the period of the loan. Terms
can vary between 10 to 40 years. Generally, the shorter the term of the loan, the lower
the interest rate. The most popular mortgage terms are 30 and 15 years. With the
traditional 30 year fixed rate mortgage your monthly payments are lower than they would be
on a shorter term loan. But if you can afford higher monthly payments, a 15 year fixed
rate loan allows you to repay your loan twice as fast and save more than half the total
interest cost of a 30 year loan. The payment on fixed rate fully amortized loans are
calculated so that at the end of the term the mortgage loan is paid in full. During the
early amortization period of the loan, a larger percentage of the monthly payment is used
for paying the interest and only a small portion goes to repay the principal. As the loan
is paid down, more of the monthly payment is applied to principal. |
- Monthly payments are fixed over the
life of the loan. - Interest rate does not change.
-
Protected if rates go up.
- Can
refinance if rates go down with no pre-payment penalty. |
- Higher interest rate. - Higher
mortgage payments.
- Rate
does not drop if interest rates go down. |
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ADJUSTABLE
RATE FIXED TERM |
Interest Rate |
Term |
Rate Adjusts |
Description |
Advantages |
Disadvantages |
Adjustable |
30yr |
- Monthly - interest rate
changes each month. - 6 Months - interest rate
changes every 6 months.
- 1
Year - interest rate changes every year.
-
3/1 - interest rate is fixed for the first 3 years and then changes every year.
-
7/1 - interest rate is fixed for the first 7 years and then changes every year
-
10/1 - interest rate is fixed for the first 10 years and then changes every year. |
Adjustable rate mortgages have become
one of the most popular and effective tools for home buyers. Developed during a time of
high interest rates that kept many people out of the housing market, the Adjustable, know
as ARM, offers lower initial rates by sharing the future risk of higher interest rates
between borrower and lender. Adjustable rate loans can be an excellent choice of financing
under certain conditions, such as rising income expectations, high interest rates, and
short-term home ownership. But because payment and interest rates can increase, either
steadily or irregularly, home buyers considering this kind of mortgage need to have the
income to keep up with all possible rate and or payment changes. Each Adjustable
rate Mortgage has 4 basic components:
-
Initial Interest Rate - which is typically one to three percentage points lower than
that of most fixed rate mortgages. Lower interest rates also make ARMs somewhat easier to
qualify for. The initial interest rate is tied to certain economic indicators that dictate
in part what the monthly payments will be.
-
Adjustment Interval - the time between changes in the interest rate and monthly
payment.
-
Index - against which lenders measure the difference between what they are making on
their investment in the mortgage and what they could be making on other types of
investments. The most popular index is based on the rate of return on a one-year Treasury
Bill.
-
Margin - or the additional amount the lender adds to the Index to establish the
adjusted interest rate on an ARM. The margin is usually 1.5% to 2.5%. |
- Lower initial monthly payment. - Lower
payment over a shorter period of time.
- Rates
and payments may go down if rates go down.
- May
qualify for higher loan amounts.
-
Conversion to a fixed rate loan may be available. |
- More risk. - Monthly
payments may change over time.
-
Potential for high payments if rates go up. |
In addition to the four basic components, an ARM usually contains certain consumer
safeguards such as interest rate "caps", which limit the amount that the
interest rate applied to the payments may move. This prevents the amount of interest the
borrower pays from rising higher than perhaps the homeowner can afford. For instance, a
typical ARM would have a 2% point "cap" over the life of the loan. This means
that a loan with an initial interest rate of 5% would be able to go no higher than 7% over
the life of the loan. Another safeguard found on some ARMs are monthly payment
"caps" that limit the amount homeowners need to increase their payment at
adjustment time. Monthly payment "caps" can, however, sometimes prevent the
monthly payment from increasing enough to keep up with the rise in the interest rate,
causing negative amortization ...resulting in higher or more payments for the homeowner
later on. Some ARMs also allow the borrower to transfer the mortgage to a new home buyer,
usually with the same terms if the new home buyer qualifies for the loan. And some ARMs
allow the borrow to change an ARM to a fixed rate mortgage, usually at the end of some
predetermined period, locking in a lower interest rate. |
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BALLOON MORTGAGES |
Interest Rate |
Term |
Description |
Advantages |
Disadvantages |
Fixed |
5yr
7yr |
Balloon loans are short term mortgages
that have some features of a fixed rate mortgage. The loans provide a level payment
feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage,
balloon loans do not fully amortize over the original term. Balloon loans can have many
types of maturities, but most balloons that are first mortgages have a term of 5 to 7
years. At the end of the loan term there is
still a remaining principal loan balance and the mortgage company generally requires that
the loan be paid in full, which can be accomplished by refinancing. Many lenders have
other options such as a conversion feature at the end of the term. For example, the loan
may convert to a 30 year fixed loan at the 30 year market rate plus 3/8 of a percentage
point. Your conversion can be guaranteed based on certain criteria such as having made
your last 24 payments on time. The balloon mortgage program with the conversion option is
often called a 7/23 convertible or 5/25 Convertible. |
- Lower initial monthly
payment. - Lower payment over a shorter
period of time.
-
Many balloon mortgages offer the option to convert to a new loan after the initial term. |
- Risk of rates being higher at
the end of the initial fixed period.. - Risk of foreclosure if you
cannot make balloon payment or if you cannot refinance or if you cannot exercise the
conversion option.. |
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STATED INCOME LOAN |
Interest Rate |
Term |
Description |
Advantages |
Disadvantages |
| - Fixed -
Adjustable |
Various |
Borrowers who do not want to have
their annual income verified by the lender, may request a "Stated Income Loan"
where the lender uses the borrower's assets as the criteria for approving the loan instead
of the borrower's income. |
- Don't need to verify income. - Faster
approval. |
- Higher interest rates. - Higher
down payment. |
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NO POINTS OR FEE LOANS |
Interest Rate |
Term |
Description |
Advantages |
Disadvantages |
| - Fixed -
Adjustable |
Various |
Borrowers who do not wish to pay
closing costs or "Discount Points" to the lender can request a "No Point or
Fee" loan. The lender will recoup the closing cost or discount points by increasing
the interest rate on the loan. Or, the lender will add the fee to the principal of the
loan causing the borrower to pay a higher monthly payment to cover the fees normally paid
by the borrower and or the seller at the closing of the loan. |
- No Closing costs. - Less
monthly required to close the loan. |
- Higher interest rates. - Higher
payments. |
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LOW & BAD CREDIT LOANS |
Interest Rate |
Term |
Description |
Advantages |
Disadvantages |
| - Fixed -
Adjustable |
Various |
Borrowers who have had problems in the
past with late payments, slow payments, bankruptcies or other credit difficulties, can
still request a loan by using the "Imperfect Credit" program also know as
"BC" loans. Since the lender will be using the property as collateral for the
loan, the borrower can still obtain a loan with a less then perfect credit
history....however, the lender will require higher interest rates and other restrictions
not applied to loans with better credit ratings. |
- Potential for reestablishing
credit if you pay your mortgage on time.. - When used for debt
consolidation, you may be able to reduce your monthly debt payment. |
- Higher interest rates. - Higher
payments.
-
Terms may not be as favorable.
-
Harder to get long term fixed loans.
-
Loans may have prepayment penalties. |
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HOME EQUITY LINE OF CREDIT |
Interest Rate |
Term |
Description |
Advantages |
Disadvantages |
Adjustable |
Various |
Borrowers may use the equity they have
built up in their home to borrow funds against that equity at an interest rate that may be
lower than the rate they are paying on other loans such as credit card or installment
loans. If the home value has increased over the years, the borrow can tap that increase in
value using the "Home Equity Line of Credit" to pay off 15 to 18% credit card
balances. The line of credit loan is open ended and can be used at any time in any amounts
up to the max allowed under the line of credit. As the borrower receives other funds from
other sources, he may pay back the funds borrowed using the line of credit. This open line
of credit has an adjustable interest rate as interest rates in general move up or down. |
- You only borrow what you
need.. - Pay interest only on what you
borrow.
-
Flexible access to funds
-
Interest may be tax deductible. |
- Rates can change. The maximum
interest rate is normally high.. - Payments can change.
-
Harder to refinance your first mortgage. |
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HOME EQUITY FIXED LOAN |
Interest
Rate |
Term |
Description |
Advantages |
Disadvantages |
Fixed |
Various |
Borrowers may use the equity they have
built up in their home to borrow funds against that equity at an interest rate that may be
lower than the rate they are paying on other loans such as credit card or installment
loans. If the home value has increased over the years, the borrow can tap that increase in
value using the "Home Equity Loan" to pay off 15 to 18% credit card balances. Or
the borrower may want to make additions or improvements on the home to raise it's value.
The amount of this loan is the difference between the current principal balance of the
loan on the property and the current value of the property. If the current value of the
property is $500,000 and the current principal balance on the existing mortgage is
$340,000, then the amount of the home equity loan could be $ 160,000, depending on the
borrower's credit rating. |
- Fixed payments. -
Interest may be tax deductible. |
- Higher interest rates than on
first mortgages.. - Harder to refinance your
first mortgage. |
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CONSTRUCTION LOAN |
Interest Rate |
Term |
Description |
Advantages |
Disadvantages |
Adjustable |
Up to 18 months |
Borrowers who are building their own
home can apply for a "Construction Loan" to pay for the construction of their
home. The construction loan will then be converted into a 30 year fixed or adjustable
mortgage on their new home. The lender pays the builder in installments as the builder
completes stages of the home taking the responsibility off the borrower's shoulders. |
- One loan, one closing. - One
loan approval.
-
Choice of Prime minus 1% construction rate of 5/1, 7/1, or 10/1 Adjustable rate.
-
No rate risk for permanent loan.
-
Up to 19 month build out period.
-
Loan to value loans of 90% of cost of home.
-
No prepayment penalties.
-
30 year term plus construction time. |
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FIRST TIME HOME BUYER LOAN |
Interest Rate |
Term |
Description |
Advantages |
Disadvantages |
| - Fixed -
Adjustable |
Various |
If you are buying your first home, you
may qualify for a "First Time Buyer's" loan. Because you have no history of
mortgage payments the lenders will allow you to get into your first home with more ease
buy making the requirements a little easier, the interest rate a little lower and the down
payment a little less. |
- Lower down payment - Easier
to qualify
-
Sometimes you may get lower interest rates |
- May be subject to income and
property value limitations. - Some programs which have
government subsidies may have a recapture tax if you sell the house to early. |
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