September 23, 2017

Loan Options

There are three basic categories of mortgage loans available. Review these options to determine which loan might be the best for you. Feel free to call if you have any questions. It is my goal to make you feel comfortable with the loan process and to help you make better financial decisions.

30 Year Fixed Mortgage

This type of loan has 360 monthly payments that remain the same for the entire 30 year period after which time the loan is paid in full. The monthly payment is based on an interest rate which does not change over the term of the loan (hence the term “fixed rate”). See More…

15 Year Fixed Rate Loan

This type of loan is the same as the 30 year fixed rate loan except the life of the loan is 180 months as opposed to 360 months. Since the loan is being paid faster than either the 30 year fixed rate loan or the 20 year fixed rate loan, monthly payments for this type loan are higher than the other two loans. However, the savings over the life of the loan is substantial.

Generally, the longer a lender agrees to keep the interest rate “fixed”, the greater the risk to the lender, therefore, in most instances, interest rates on 15 year fixed rate loans are slightly lower than on 20 or 30 year fixed rate loans. 20 Year Fixed Rate Loans are also available.

7/1 Adjustable Rate Mortgage (ARM)

This type of loan has monthly payments that are based on a 30 year repayment schedule and the interest rate remains fixed for the first 84 months (seven years). After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). This is referred to as the “adjustment period”. The new rate is based upon fluctuations in an index (typically the One Year Treasury Security).

However, this type of loan program usually has limits on how much the interest rate can change (either up or down) at each adjustment date. Typically, this limit is 2% (FHA is 1%) and is referred to as an “adjustment cap”. There is also a limit as to how much the interest rate can change from the initial interest rate over the entire life of the loan (typically 6%) and this is referred to as a “lifetime cap”. The monthly payment changes, as needed, at each adjustment period, to reflect the adjusted rate.

Adjustable Rate Mortgages are a good product for the buyer who is somewhat transient in their job or if the home is a starter home with plans for a family in the near future or if downsizing is a certainty.

5/1 Adjustable Rate Mortgage (ARM )

This type of loan is similar to the 3/1 ARM except for the fact that the interest rate remains fixed for the first 60 months (five years) as opposed to the first 36 months. After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). As with a 7/1 ARM, the index is typically the One Year Treasury Security index, the adjustment cap is typically 2% and the lifetime cap is typically 6%. 3/1 ARMs may also be available.