A fixed rate mortgage locks in your interest rate and monthly payments for the entire life of your loan. (Taxes, of course, may change.) It may be a good solution if you're likely to stay in your house for a considerable period of time and want the security that there will be no change to your principle and interest portion of your monthly payment.
Advantages:
Choice—Lock in today's low interest rates for your choice of terms: 10, 15, 20, 25 or 30 years.
Peace of mind—Your rate won't change, so you don't need to worry about market fluctuations.
Planning help—With unchanging monthly payments, budgeting and long-term financial planning can be easier.
Features:
A wide choice of terms gives you the flexibility to select a mortgage appropriate for the length of time you expect to live in your house or how quickly you want to pay off your mortgage.
Considerations:
Fixed rate loans are usually priced higher than adjustable rate mortgages and may cost you more. Keep in mind that, on average, most people move or refinance within seven years. If current market rates are high, you may get a better price with an adjustable-rate loan for the initial period.
An adjustable rate mortgage means that the interest rate changes over the life of the loan—according to the terms specified in advance.
Advantages:
Increased buying power—ARMs are usually priced lower than fixed-rate mortgages so you can lower your initial monthly payments or assume a larger mortgage. Compare rates, points & payments.
Flexibility—You can lock in the initial rate for three to ten years, making your choice based on the length of time you intend to own your home. Remember that, on average, most people move or refinance within seven years.
Suits your lifestyle—ARMs are good choices for homeowners who plan to relocate (for example, with their company or the military) or for those who are purchasing their first home and plan to be in the property only for three to ten years.
Features:
The rate and monthly payments do not change for the first 3, 5, 7 or 10 years of the loan term. Terms available:
10/1 Adjustable Rate Mortgage—With this mortgage, the initial rate of the loan is fixed for the first ten years of repayment. After 10 years, the rate adjusts every year thereafter for the remaining life of the loan. The loan is amortized over 30 years, so you'll enjoy the stability of a 30-year mortgage at a lower price than a fixed-rate mortgage of the same term. But an ARM is likely not the best choice if you're planning on owning the same property for more than 10 years.
7/1 Adjustable Rate Mortgage—This mortgage offers an initial rate of the loan that is fixed for the first seven years of repayment, then the rate adjusts every year thereafter for the remaining life of the loan.
5/1 Adjustable Rate Mortgage—With this mortgage the initial rate of the loan remains fixed for the first five years of repayment, and then adjusts every year thereafter. Remember that your rate and monthly payments may go up after only five years, so this choice is best if you're expecting to sell or refinance the property within that period.
3/1 Adjustable Rate Mortgage—With this mortgage, you'll have three years at the initial fixed-rate, then the rate adjusts every year for the remaining life of the loan. A good choice if you expect to move or refinance in a relatively short period of time. But a much shorter fixed-rate period means your interest rate (and therefore monthly payments) may begin to fluctuate after three years.
At the conclusion of the initial three to ten year term, the rate is adjusted (up or down) at predetermined times and the monthly payment will then increase or decrease.
Most ARM programs offer "rate cap" protection, which limits the amount the rate can be increased each year and over the life of the loan.
All ARMs are amortized over 15 to 30 years.
Considerations:
At the conclusion of the initial three to ten year term your monthly payments can increase if interest rates go up. Keep in mind that ARMs are best for homeowners who aren't planning on staying with a property for a long period. If you're on a fixed income, an ARM (especially a short-term ARM) may not be your best choice.
Interest Only (IO): fixed or adjustable rate mortgages
Not for everyone. As a matter of fact not for most people. Don't even consider this unless you fully understand that you will not be paying off your home with an interest only payment. However, if you are a good saver and savvy investor this might make sense for you. As long as you save the amount you would be paying for principle you can use it to pay the loan off at a later date with inflated (Cheaper) money. If this does not make sense to you at this point, you probably shouldn't be considering an interest only mortgage.
The interest rates on interest only mortgages are a little higher than on an amortized mortgage. These usually make more sense if you have a large loan amount to start with.
Advantages:
Choice—Choose between our interest-only fixed rate or interest only adjustable rate mortgages, depending on your financial needs. Either choice may result in a much lower monthly payment than a traditional mortgage.
Liquidity—Reduce your monthly mortgage payment and increase your cash flow to pursue other financial opportunities.Flexibility and control—If you wish, you may reduce your future monthly payments by paying on the loan principal without a pre-payment penalty.
You only pay the Interest amount of the loan for a set period. This gives you more cash on a monthly basis BUT at the expense of not paying off principle.
This can work for people that are very much in control of their finances and have either a lot of equity in their home and expect the equity to increase with inflation, therefore paying off the loan at a later date with "cheaper" dollars. In this case you would either invest the monthly savings to be used to eventually pay off the loan at a later date.
Interest only is also good for those that plan to be in the property for a very short time and do not care about paying down principle.
Payment flexibility—Choose to pay down your principal, if you wish, during the 10-year interest-only period without penalty. Any principal payments will be reflected in recalculated interest-only payments.
Considerations:
Your monthly payments can increase if interest rates go up. Keep in mind that ARMs are best for homeowners who aren't planning on staying with a property for a long period. If you're on a fixed income, an ARM (especially a short-term ARM) may not be your best choice.
Option ARM loans are best for people with short term horizons or are most concerned on lowering their monthly payments to the minimum. These are good for people with fluctuating income (bonus oriented) and have a good control of their finances.
This is basically an ARM with at least three options of how you pay your monthly payments. You can choose a different payment plan each month. Your choices are:
1. Interest Only payment: This will not pay down your principle, but you have a lower payment.
2. Amortized payment: This will pay down your principle.
3. Start Rate Payment: This is a special reduced rate that not only does not pay down your principle, it actually adds to the principle. Meaning if you choose this payment you owe more on your home than you did the month before! This is called negative amortization (Neg-Am).
40 Year fixed rate mortgage: This is a new type of loan. Some lenders offer a straight 40 year fixed, amortized over 40 years and stays fixed for the whole 40 year term. Other lenders are amortizing the loan over 40 years (keeping payments lower) but the loan comes due in only 30 years, at which point you must pay off the balance, like a balloon.
Conforming loan: This is a loan that can be (and probably will be) sold on the secondary market. It must conform to the largest of the agencies (Fannie Mae) limits. There are several key risk factors that are used to determine if a loan conforms to their criteria. Credit score, LTV, Debt Ratios and loan amounts are the main criteria.
Jumbo loan: Loans over $417k on a single family home or condo are considered Jumbo loans. Jumbo limits are higher on 2-4 unit buildings. These are non-comforming loans.
Sub-Prime loans: These are loans made to people with credit scores that are too low to qualify for a conforming loan. Consequently the rates and/or costs of these loans are higher but due to the credit situation or other criteria, the borrower has less choice.
Home equity loan: These are second mortgages used to tap into your homes equity. Usually a fixed rate for a fixed term.
HELOC: (Home Equity Line of Credit) Also a second mortgage used to tap into the homes equity. The interest rate on a HELOC is usually tied to an index like the prime rate and will change monthly.
80/20: An 80/20 loan is basically a hybrid loan or a first and a second mortgage combined. The first mortgage is up to 80% of the value of your home and the 20% is for a second mortgage on the home. This is for someone wanting to get into a home with no money down. You must have great credit and income in order to qualify for one of these types of loans.
80/10/10: An 80/10/10 is similar to an 80/20 only you would have a first mortgage of 80% of your homes value, a second mortgage of 10% of the value and 10% down payment or equity in your home.
80/15/5: Just what it seems. 80% on the first mortgage, 15% on the second and 5% down.
Why would you want an 80/10/10? Simply because you avoid paying PMI (Private Mortgage Insurance) which can be very expensive. PMI is required for mortgages with a LTV of 80% or higher. PMI is not tax deductable and an added expense that most people try to aviod. Always consider an 80/20, 80/10/10 or 80/15/5 hybrid mortgage when you don't have the 20% equity or down payment needed for your loan. It will usually be a lower monthly payment and it is fully tax deductable.
Which type of mortgage is best for me?
Today there are more types of real estate mortgages to choose from than ever before. Choosing the right loan for you is very important and may seem confusing at first. I can help you make this important decision by explaining the most appropriate type of mortgage for your situation.
My recommendation will be based not only on the numbers but also on your personal psychological tolerance. Can you sleep at night with an ARM (adjustable rate mortgage) not knowing where the rates will be in 12 years? Or, will you sleep better knowing you are moving in 5 years and aren't paying more than you should by being locked into a higher rate loan for 30 years? I want you to sleep very soundly knowing that you have the right loan at the best rate and at the lowest costs.
There are several types of loans, including: short terms, long terms, fixed rates and adjustable rates, interest only and option ARMs, just to name a few. The best mortgage for you will depend on your situation, your goals and your personal tolerance level.
How long will your have your mortgage? This is your first major consideration. Generally the shorter the term of the loan, the lower the interest rate. If you know for sure that you will be moving in 4 years, then a 5 year ARM is a great choice. If you only think you will move in 4 years, than you must weigh the savings against your tolerance for a changing mortgage payment down the road. If you plan to be in your home forever, then a fixed rate mortgage is perfect for you, especially now while rates are still a bargain.
Below are explanations of some of the most common loans available:
Mortgage/Loan Types:
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