What Mortgage Programs are Available?

Fixed Rate Loans
The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.

Fixed rate mortgages are available for 40years, 30 years, 20 years, 15 years and even 10 years. There are also "biweekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)

Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.

Fixed ARM or Hybrid ARM Loans
Loans are available as 3/1, 5/1, 7/1 & 10/1.  The first number indicated how many years the interest rate will be fixed; the second number tells how often the loan will adjust in years.  If you have a high degree of confidence that you will not be in this home for more than 5 years, a 5/1 ARM might be the right program for you. 

With a 5 year ARM, your rate is locked in at an introductory rate (typically less than a 30 year fixed rate) for the first five years of the mortgage and then will begin adjusting upward or downward after the introductory period expires.

The great thing about short term ARM programs is that they typically carry a significantly lower rate than their fixed rate counterparts.  This factor may lead to big savings for the consumer.  However, these benefits must be weighed with the added risk that these loans bring to the table.   5 year adjustable rate mortgage programs are not recommended for clients who do not actively monitor their finances.

It is very important that homeowners mark their calendar near the end of the introductory period.  At that time, if one’s payment is going to adjust upward significantly and they are planning on staying in the home, they may want to refinance to another ARM or lock in on a fixed rate home loan.  Here are some questions you need to think about before obtaining an ARM loan:

  How long do I plan to be in the home?
  Will I be able to cover higher payments if the rate increases?
  How much will I save with an ARM? How could those savings help me and my family with other needs?
  Could an adjustable rate mortgage help me afford a more expensive home and do I believe that my future income will cover the risk of future adjustments in rate?

Stated Income Loans
These loans are ideal for self employed borrowers who can not document their income. Interest rates will vary on these programs depending on your credit score and down payment. With good to excellent credit and more than 10% down, a self employed borrower may eligible to receive the same rate as someone who documents their income.

Interest Only Loans
Interest-only mortgage loans are like regular home loans but instead of paying monthly principal and interest on the loan, only the interest is paid for the first five or ten years, usually the term of the loan. Interest-only mortgages provide a popular way for homeowners and investors to take advantage of a cheaper and more affordable mortgage option.  By only paying the interest on this mortgage loan, the homeowner or investor can invest, what would be their principal payment, in stocks, savings, or a small business. 

The bet is the investment will outperform a standard mortgage loan for the first 5 to 10 years.  And after the 10 years is up, the interest-only mortgage loan holder will have the money to refinance or pay of the mortgage in a lump sum.

So, why should the prospective home buyer or investor sink his discretionary income into the principal of a standard mortgage loan when he can instead use that principal as a better investment hedge against paying higher mortgage rates, enhancing personal wealth?

Interest-only mortgage loans may be
advantageous for the following:
  Practiced investors who are confident that principal payments, ordinarily paid on a standard 30-year, fixed mortgage or ARM, are instead invested in a stock instruments that will make money
  People who's income takes the form of infrequent bonuses or commissions
  People who expect to make a lot more money in the near future

Interest-only mortgage plan
disadvantageous include:
  If it's an ARM, rising mortgage rates heightens risk
  Many people will not invest or save the extra money and spend it instead
  Many people are not disciplined enough to pay the extra money on principal payments when they don't have to
  Anticipating income growth may fall short  
  Anticipating home appreciation may fall short  

Balloon Mortgage
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.

Subprime Loans

Subprime loans (bad credit loan) are loans to borrowers who have less than perfect credit history but can still pay for a mortgage. Subprime loans are also used to pay debts and improve the credit ratings of the borrower.   The Subprime loan lending rate will be higher than the standard rate for a conventional home mortgage loan.