Residential Loan Programs
By Pierre Mouchette | Bits-n-Pieces
The traditional fixed-rate mortgage is the most common type of loan program, where monthly principal and interest payments never change during the life of the loan. Fixed-rate mortgages are available in terms ranging from 10 to 40-years. This type of mortgage is structured or amortized to be completely paid off by the loan term.
Adjustable-Rate Mortgages (ARM)
These are loans whose interest rate can vary during the loan's term. These loans usually have a fixed interest rate for an initial period and can be adjusted based on current market conditions. The initial rate on the ARM is lower than on a fixed-rate mortgage which allows you to purchase a more expensive property.
Hybrid ARMs (3/1, 5/1, 7/1, 10/1)
Hybrid ARM mortgages, also called fixed-period ARM, combine features of both fixed-rate and adjustable-rate mortgages. A hybrid loan starts with an interest rate fixed for years (usually 3, 5, 7, or 10). Then, the loan converts to an ARM for a set number of years.
Interest Only Mortgages
A mortgage is called interest only when its monthly payment does not include principal repayment for a certain period. Interest-only loans are offered on fixed-rate or adjustable-rate mortgages and option ARMs. At the end of the interest-only period, the loan becomes fully amortized, thus resulting in significantly increased monthly payments. The new amount will be more significant than it would have been if it had been fully amortizing from the beginning. The longer the interest period, the larger the new payment will be when the interest-only period ends.
Balloon Mortgages have a note rate that is fixed for an initial period, and then the remaining principal balance is due at the end of the term. When the final balloon payment is due at the end of the term, the borrower can either refinance into another mortgage or pay off the balance.
A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you retain your homeownership. A reverse mortgage is like a mortgage, and the bank pays you! The amount you are eligible to receive is generally based on your age, the equity in your home, and the interest rate the lender is charging.
Because you retain title to your home, you also remain responsible for taxes, repairs, and maintenance. Depending on your plan, your Reverse Mortgage becomes due with interest either when you move, sell your home, die, or reach the end of the pre-selected term. The lender does not take title to the house when you die, but your heirs must pay off the loan.
Best Loan Programs
What kind of loan program is best for you? Fixed-Rate? Adjustable-Rate? Hybrid ARM? Interest Only? Balloon? Government-Sponsored Loan? The truth is there is no correct answer! With so many different types of loans and term lengths, the choice can be difficult. Your situation and common sense should determine the best kind of loan for you. By asking yourself a few questions, you can target the best selection.
The time you plan to stay in your home. Consider:
1-3 years 3/1 ARM or 1-year ARM
3-5 years 5/1 ARM
5-7 years 7/1 ARM
7-10 years 10/1 ARM or 30-year
10+ years 15-year fixed, or 30-year fixed