While many loan products now have 'tighter guidelines'= higher credit scores and require fuller documentation to qualify, we have many banks still funding 100% mortgages and other hybrid loans. Consult your mortgage professional.
In any market, the kinds of mortgage products currently on offer to residential consumers may change. While there are literally hundreds of lenders with any number of variations on these themes, these descriptions are a general guide.
Most homeowners refinance (or move) every 5-7 years these days. Ask yourself: "What is more important to you, your interest rate or monthly payment?" If you intend to keep your home over 10 years, you will still find that cyclical interest rate changes may make refinancing very attractive. Of course, with our currently low rates, you might want to consider locking a long term loan before rates start their spring dance upward!
30 Year Fixed (conventional)
Conventional loans are the loan of choice in a changeing market with today's low rates. They are ideal if you plan to stay in your property for 10 years or more. Interest Rate and Payment do not change for the entire term of 30 years. It self-amortizes to a zero balance in 30 years. (Some feature a short term Interest-Only option that allows you to re-amortize the principle after the initial period, based on any principle or lump sum payments.)
15 Year or 20 Year Fixed (conventional)
Similar to a 30 year Fixed, only the payment amortization period is 15-20 or 25 years. Monthly payments will be higher than a 30 year loan due to the shorter amortization period. These loans are popular for refinancing if you have a low current mortgage and an increase in monthly payment is not a problem. Rates are generally 3/8 - 5/8 percent lower than 30 year loan due to the shorter guarantee period
40 Year or 50 Year Fixed --all the rage! As a way to reduce monthly payments, some savvy Non Prime lenders came up with these longer term fixed products and now many lenders offer them. A closer look shows the price you pay for this priviledge so be sure to compare before you leap for longer terms.
Adjustable "Step" Loans:
7/23 Two step (also 5/25 and 3/27 and 2/28) These are 30 year loans with an initial interest rate and payment that is fixed for the first 2-7 years. These may be good choices if you know that you need this mortgage for only 4-7 years. At the end of the fixed term you have 3 options: 1.To reset the interest rate and payment for the remaining 23 years. The interest rate will be calculated using a formula that for a new rate approximately 3/8 - 3/4 percent higher than current conventional rates. They will be fixed for the remaining 23-28 years of the loan. 2. To refinance the loan to another program. 3. To pay the loan off in full or refinance with another lender.
1 year ARM
This the most popular Adjustable-Rate-Mortgage (ARM). Interest rate and payment is fixed for the first 12 months. They change once every 12 months during the entire term of the loan (usually 20 year amortization terms). There are limiting "Caps" to how high the rate can go that prevent catastrophic rate changes. These "Caps" are approximately 1-2% every year and 5-6% over the initial rate for the life of the loan. Initial rates are approximately 1.5-3% lower than 30 year fixed rates. These loans are popular with people that need funds to ‘get in the door’ quickly. Naturally you will want to verify there is no prepayment penalty to hinder a quick exit!
3/1 ARM (also 1/1, 5/1, 7/1 and 10/1)
These Adjustable Rate Mortgages are 30 year loans with interest rate and payment fixed for initial period of 3 years. At this time, the interest rate and payment changes once every 12 months for the remainder of the loan. These generally offer rates approximately 3/8% - 5/8% lower than 30 year fixed loans. They are popular with people that will keep their loan shorter terms
For a loan of $210,000 or under, the interest rate on a 10/1 ARM for example could be higher than the 30 year fixed loan (at today's low rates) so be sure to ask your mortgage lender to provide a comparative quote. If you are financing over $210,000, and keeping the property for less than 10 years, then an ARM may be ideal for your needs.
If you take out a 1/1 LIBOR ARM for example the rate will be very competitive initially...but the LIBOR index is highly volatile so don't count on keeping it very long. So check the index!
Pay Option or Cash-Flow ARM
This mortgage is based a Rate plus Index, determined by the MTA, LIBOR, COFI (or other) Index. The entry rates are quite low (1.25%) during the first year, plus a chosen index, and follow the chosen Index every month. Qualifying APR is usually lower than a conventional loan.
Each month you have the OPTION of several payments to manage your cash flow every month. Usually you have a fixed Minimum payment (which rises once a year), an Interest Only payment and 2 fully amortized payments based on 30 year and 15 year terms. They are ‘re-cast’ every five to ten years based on the remaining principle. The principle remaining depends on which option you pay.
Option ARMS are often the mortgage of choice for Investors and Self Employed Entrepreneurs who prefer to use their money on investments or maintaining liquidity. OPTION loans have been removed from some lender offerings in August 2007. Check with your mortgage professional.
LOW DOWN Loans
These amazing new products allow closing costs to be included in the mortgage for up to 103% Loan to Value. Specific banks vary on their offerings, so speak to your broker. Mortgage Insurance is often required. They are similar to FHA and Access loans with less paperwork. See our separate blog on LOW Down Loans
FHA Loans
FHA loans are guaranteed by the Federal Home Administration through a nominated lender. The maximum loan amounts are determined by the lowest average house price in your area. Generally, the program availability is limited to 30 and 15 year fixed rates and limited ARM products. “Gift funds’ are allowed as down payments and they allow sellers to contribute up to 6% toward buyer's costs.
These loans are ideal for clients who have not owned a home within the last two years. FHA also has more flexible guidelines regarding credit history and types of properties including newer Manufactured Homes. Just be prepared for the extra paperwork!
VA Loans
These loans are guaranteed by the Veteran's Administration--and are only available to qualified US Veterans. The program is limited to 30 and 15 year fixed & ARM products. The advantage of VA over FHA is that their limits on loan amount are higher--related directly to the borrower’s debt ratio and creditworthiness and remaining VA entitlement. These products are not always very competitively priced, but may suit a borrower with property or credit issues.
ALT-A Loans and B/C Loans (or Non Prime)
ALT-A Loans that are offered to qualified applicants that may have impaired credit or short term employment issues. The terms allow higher Debt to Income Ratios up to 55%. B/C Loans are offered to qualified applicants that may have recently filed for Bankruptcy, or have derogatory issues on their credit. Their sole purpose is to offer financing to these applicants until they can qualify for Conventional "A" financing. The interest rates and programs vary, based upon many factors of the borrowers financial situation and credit history.
August 2007: many banks are now limiting 90-95% financing for Non Prime Loans.
Home Equity Loans
These loans are 10, 15 or 20 year fixed or ARM Mortgages. You can use these as second mortgage/down payment on a purchase, or take cash out of your property based on the total equity of your home. They are often used to consolidate debt or make home improvements.
Home Equity Lines
Often referred to as a HELOC or Home Equity Line of Credit, these loans are 10, 15 or 20 year ARM Mortgages. You can use a HELOC as a second mortgage, to take cash out of your property or as a down payment on a purchase. The terms allow the interest only payments during the loan term, and may be based on a longer 20 or 30 year amortization period. Many banks issue a check book or card on these accounts. Principle amounts due at the end of the term (if you only paid interest) are either paid off or refinanced at the end of the term. HE Lines are usually based on Prime Rate (currently 8.25%) plus a margin based on credit history and loan size. They are an excellent source of $20,000 or more (up to 90% LTV combined in your 1st mortgage plus the HE Line). They can be used for personal purposes, including debt consolidation, education, etc.
Custom Construction Loans
These loans are designed to allow a home owner to custom build their own home, and may cover the cost of acquisition of land as well as pay the builders and associated contracting and design fees necessary to complete the home. Visit BuildNet for more specific information about how construction loans work. After the term of construction (from 2 months to maximum of 2 years) the loan is converted into a Permanent Mortgage. Rates are higher during the building period due to increased risk. Builder, Borrower and Project are approved separately. We recommend you work with a seasoned construction lender. Be prepared to build your business case!
1. Custom Perm Loans
Custom Perm or One-Step Construction loans are designed to allow a home owner to acquire land, custom build their own home, hire an architect and or contractor or builder to manage the project, and automatically or ‘roll over’ the balance after construction is complete into a Permanent loan with only one closing and the associated costs. Custom Perm loans ofer the option of having your interest payments factored into the loan (so you don't make payments during the construction term) with a guaranteed rate at roll over. The advantage to builders over Spec building is that the homeowner carries the financial risk and the builder is paid by the bank every month (after an inspection). The advantage to the homeowner is a sense of ownership of the project and saving additional closing costs.
2. Renovation Loans These loans are designed to allow a prospective Home Owner or Investor to acquire a home in need of repair with extra funds for the purpose of upgrading the home. An appraisal determines the 'as is' and 'projected' value of the home, based on your renovation plans. The lender holds the funds necessary for the renovation for up to 6 months during which time payments are made as repairs are completed and approved by the appraiser.
3. Land and Lot Loans
Lot loans are designed to allow a prospective home owner to acquire land for the purpose of building a home. The terms are usually for 1 to 5 years (or longer), after which time the loan is wrapped into a Construction Loan or paid off. Lenders generally require 25-30% down payment due to the higher risk of an unimproved property. Fewer lenders offer lot loans so interest rates are often higher. Once you've owned your lot for a year, the appraised value can be used to value your contribution to your construction project.
4. Bridge Loans
Many lenders offer excellent short term loans for homeowners as a draw against their current home equity while building or relocating, within the same state or lender region. This avoids needing to make a second mortgage payment while you are in transition, but naturally the new loan would be higher than your current mortgage.
Wishing you every mortgage sanity! Loannetter
For credit management pointers visit NetCredit
©2007 susan templeton
