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Which type of loan
is best for you?
There
isn't a single or simple answer to this question. The right type of
mortgage for you depends on many different factors.
For example, fixed-rate mortgage can save you many thousands of
dollars in interest payments over the life of the loan, but your
monthly payments will be higher. An adjustable rate mortgage may get
you started with a lower monthly payment than a fixed-rate mortgage,
but your payments could get higher when the interest rate changes.
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Types of Mortgage Loans |
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Fixed Rate Mortgages
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.
With fixed rate mortgage (FRM) loan the interest rate and your
mortgage monthly payments remain fixed for the period of the
loan. Fixed-rate mortgages are available for 30, 25, 20, 15
years and 10 years. Generally, the shorter the term of a loan,
the lower the interest rate you could get.
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. |
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Adjustable Rate Mortgages (ARMs)
These loans generally begin with an interest rate that is 2-3
percent below a comparable fixed rate mortgage, and could allow
you to buy a more expensive home.
However, the interest rate changes at specified intervals (for
example, every year) depending on changing market conditions; if
interest rates go up, your monthly mortgage payment will go up,
too. However, if rates go down, your mortgage payment will drop
also. |
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Standard
ARM Programs
A few options are available to fit your individual needs and
your risk tolerance with the various market instruments.
ARMs with different indexes are available for both purchases and
refinances. Choosing an ARM with an index that reacts quickly
lets you take full advantage of falling interest rates. An index
that lags behind the market lets you take advantage of lower
rates after market rates have started to adjust upward.
The interest rate and monthly payment can change based on
adjustments to the index rate. |
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FHA
mortgage loan
An FHA mortgage loan is insured by the Federal Housing
Administration (a division of the Department of Housing and
Urban Development (HUD)). Although mortgage lenders provide the
mortgage funds, the FHA sets underwriting standards for
approving applicants. In many cases, FHA underwriting guidelines
are more lenient than conventional (not government insured or
guaranteed) underwriting guidelines. This leniency makes it
easier for borrowers to qualify for a mortgage loan (low down
payment requirements and a higher monthly debt allowance). FHA
limits the types of loan programs it insures, but it will insure
the more popular 30 year fixed, 15 year fixed and one year
adjustable loan programs. |
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VA
mortgage loan
A VA mortgage loan is a mortgage loan that is guaranteed by the
Department of Veterans Affairs (DVA). One of the biggest
advantages of using a VA loan is that the borrower can finance
the purchase of a property with no-money down. However, VA loans
are restricted to individuals qualified by military service. The
DVA will guarantee the more popular 30 year fixed, 15 year fixed
and one year adjustable loan programs.
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Introductory Rate ARM's
Most adjustable rate mortgages (ARMs) have a low introductory
rate or start rate, some times as much as 5.0% below the current
market rate of a fixed loan. This start rate is usually good
from 1 month to as long as 10 years. As a rule the lower the
start rate the shorter the time before the loan makes its first
adjustment. |
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Reverse
Mortgage
A reverse mortgage is a special type of loan made to older
homeowners to enable them to convert the equity in their home to
cash to finance living expenses, home improvements, in-home
health care, or other needs.
With a reverse mortgage, the payment stream is "reversed." That
is, payments are made by the lender to the borrower, rather than
monthly repayments by the borrower to the lender, as occurs with
a regular home purchase mortgage.
A reverse mortgage is a sophisticated financial planning tool
that enables seniors to stay in their home -- or "age in place"
-- and maintain or improve their standard of living without
taking on a monthly mortgage payment. The process of obtaining a
reverse mortgage involves a number of different steps.
The size of reverse mortgage that a senior homeowner can receive
depends on the type of reverse mortgage, the borrower's age and
current interest rates, and the home's property value. The older
the applicant is, the larger the monthly payments or line of
credit. This is because of the use of projected life
expectancies in determining the size of reverse mortgages.
Seniors do not have to meet income or credit requirements to
qualify for a reverse mortgage. |
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Balloon
Mortgages
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. Many companies have other options such as a
conversion feature at the end of the term. For example, the loan
may convert to a 30 year fixed loan at the thirty year market
rate plus 3/8 of a percentage point. Your conversion can be
guaranteed based on certain criteria such as having made your
last 24 payments on time. The balloon mortgage program with the
conversion option is often called a 7/23 Convertible or 5/25
Convertible. |
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Buydown Options
The most common buydown is the 2-1 buydown. In the past, for a
buyer to secure a 2-1 buydown they would pay 3 points above
current market points in order to pay a below market interest
rate during the first two years of the loan. At the end of the
two years they would then pay the old market rate for the
remaining term.
As an example, if the current market rate for a conforming fixed
rate loan is 8.5% at a cost of 1.5 points, the buydown gives the
borrower a first year rate of 6.50%, a second year rate of 7.50%
and a third through 30th year rate of 8.50% and the cost would
be 4.5 points. Buydown were usually paid for by a transferring
company because of the high points associated with them.
In today's market, mortgage companies have designed variations
of the old buydowns rather than charge higher points to the
buyer in the beginning they increase the note rate to cover
their yields in the later years. |
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Once you
have decided on the mortgage type you're after, narrow your
choices down by comparing interest rates, fees, from Leading
American Lenders. |
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