Mortgage Types

Is a Fixed Rate Mortgage Always Your Best Choice?

It's well known that the Fixed Rate mortgage is still the the most popular home loan originated in today's market and with very good reason. This type of mortgage loan provides a consumer with a guarantee of a fixed rate and a consistent monthly payment for the entire term of the loan. (common terms are 15 and 30 years with many lenders also offering terms up to 40 years). However, should you consider other loan options? Scroll below to read more about fixed rate home loans.

Advantages
Fixed rate mortgages provide a number of tangible benefits over adjustable rate and hybrid home loan options. These advantages include:

• Long Term Interest Rate Security
• Consistent Monthly Payments
• Automatic Principal Reduction
• Flexible Down Payment Requirements

Disadvantages
Many home loan professionals believe there are no disadvantages with a fixed rate mortgage however by simply comparing programs to programs one extremely important variable is not factored in - the Homeowner.

Because of this variable it can also be argued that fixed rates do not provide the greatest advantage for some homeowners. Remember, this is a false statement for the majority of homeowners however there are still a quite a few people who have:

• Great Self Discipline
• Opportunity and Affordability to Assume Risk
• A Stable Income Environment
• Short Term Homeowners with Realistic Timeframes

It is right for you? Ask yourself...

• Are you comfortable with today's interest rates? How much lower do you think they can go - or will they only continue to rise?
• Is the subject property a long term home or just a transitional place until you can afford more? If so, what's your timeframe for increasing your income? Is it realistic or even possible?
• Can you afford the payments for a fixed rate mortgage? More importantly, could you afford the payments of a higher fixed rate should you start with an adjustable and become subject to future interest rates?

Ask Your Lender...

• Difference in rates and monthly payments between a fixed rate mortgage and adjustable rate programs
• What advantages are there to paying points?
• About Fixed Rate Mortgages with Interest Only Options. This may be an alternative where you can realize the security of a fixed rate but have an option to make interest only payments when your budget needs it.

Is an Adjustable Rate Mortgage Your Best Choice?

An adjustable rate mortgage (ARM) is a home loan program with an interest rate that adjusts periodically to reflect changes in a specified financial index. Such an index could be the one-year Treasury, the Cost of Funds Index (COFI), the LIBOR (London Interbank Offered Rate) or other popular indexes. ARMs may adjust every six months or once a year and most ARM programs include caps that protect your monthly payment from increasing too much, as well as a lifetime cap, a rate that your ARM will never exceed over the life of the loan.

Advantages
Adjustable rate mortgages (ARMs) generally have the lowest initial interest rates meaning a lower monthly payment. This initial rate is fixed for a defined period of time and usually corresponds to the name of the product. For example, a "5 Year ARM" would mean the initial rate is fixed for the first five years.

The most popular advantage behind ARM loans is the borrower tends to qualify for a larger loan amount than they would applying for a traditional 30 year fixed rate. ARMs are generally recommended for homeowners who plan to keep the loan for a short time and are confident their income will remain the same or grow during the life of the loan.

Disadvantages
The traditional ARM mortgage (one that does not include minimum payments or negative amortization) carries very little unknown risk at the time of origination.

The biggest risk for any homeowner is simply assessing the amount of savings over a fixed rate and understanding your comfort level with possibly being exposed to much higher interest rates should you be forced to keep the property longer than expected. Remember, it's not just a matter of where rates are in 5 or 10 years - it's also a question of whether you not will still be eligible for the same type of mortgage.

It is right for you? Ask yourself...

• Will your income stay the same or increase during the live of the loan?
• Do you foresee any problems with qualifying for the same type of loan program at the end of the initial fixed rate period?
• Is your time frame of ownership realistic?

Ask Your Lender...

• How long is the initial fixed rate period?
• What index is your interest rate tied to?
• When is the fist interest rate adjustment date?
• What are the adjustment caps?
• How often can the interest rate adjust?
• Can you pay down principal without penalty?
• How are extra principal payments applied?
• Will extra payments reduce my monthly payment?

Is an Interest Only Mortgage Your Best Choice?

Before we explain interest only financing its important to clarify these loans are not for everyone and with rising interest rates more people have these loans than probably should. The success of benefiting from this type of financing often falls into whether or not the homeowner has enough self discipline to exercise the interest only payment option only when they need to. For homeowners who believe the only way to own a home is by securing an interest only loan than you should probably look at lowering your price range. These loans were originally created for wealthy consumers - not for the average income maker. It wasn't until 2002 that interest only loans become readily available in the mortgage industry - even though they have been around for decades.

What is an Interest Only Loan? Interest only loans are home loan programs where the consumer is only obligated to pay an "interest payment" for a defined period of the note. This does not mean a consumer will never pay principal but they do enjoy reduced payments for an extended period of time.

Advantages
These home loans provide consumer with Greater Purchasing Power, Payment Flexibility and an opportunity to provide Reduced Qualifying Income

Disadvantages
Some of the potential disadvantages with interest only financing include Possible Payment Shock, Short Term Security and Larger Down Payment Requirements.

Is an Option Arm Mortgage Your Best Choice?

Most consumers need to have this product explained. Introduced by Washington Mutual and World Savings over a decade ago this program this type of loan is often referred to as a Pay Option Arm, Option Arm or Cash Flow Loan. It was (and still is) greeted with high appraise by some industry professionals while others loathe it. For the average homeowner this is probably the most difficult loan program to truly understand since it involves 4 different payment options and there is always a possibility of negative amortization.

Before we dwell into the different payment options you must understand that option ARM loan programs are not for everyone however they do serve a very valid purpose for a select group of homeowners. Short term homeowners, self employed individuals and real estate investors seem to make up the greatest demographics behind these loan programs.

So What is the 1% Payment...
The advertisements hear on the radio and published in newspapers usually refer to 1% payments but the actual interest rate is much higher. the 1% is simply one of your payment options. It's a minimum payment based on 30 year principal and interest amortization at 1%. If you only pay the minimum (and many people do) than the remaining interest accrued will simply be tacked on to your loan balance. Essentially, the longer you only pay the minimum payment the larger your loan balance grows.

What are the Payment Options...
Option Arm loans come standard with four (4) payment options however a couple of these options are only available if the full principal and interest payment is less than the minimum payment due.

Additionally, there are some safeguards built in to these loans to reduce your risk exposure from rising interest rates. These safeguards are generally:

• A Fixed Interest Rate for an initial 1-month period
• A Minimum Payment Amount that Adjusts on an Annual Basis
• A Payment Change Cap
• A Lifetime Interest Rate Cap

The Payment Change Cap limits how much your minimum monthly payment can increase or decrease from the previous minimum payment. You should note that many lenders provide an exception in your note so this cap is not in effect during certain periods of your note.

Option 1 - Minimum Payment
This option (known as the Minimum Payment Option) provides the greatest monthly cash flow savings. Your payment will change annually and is initially calculated using the initial interest rate for the first 12 months. After the first year, this payment is usually re-calculated annually and based on the outstanding principal balance, remaining term and current market rates. Before applying for an option arm loan make sure to ask what index your loan is based on and the margin (see below). A Payment Change Cap* is in effect with most programs usually capping any change to within 7.5% of your original payment (annual increase or decrease)

Option 2 - Interest Only Payment
Just like the popular interest only mortgage programs this option helps the homeowner prevent any avoid deferred interest by paying the minimum monthly payment plus any additional interest accrued during the month.

Option 3 - 15 Year Fixed Rate Payment
This option allows a consumers to apply the largest contribution towards principal and term reduction. The payment required to satisfy this is calculated by amortizing your loan based on a 15-year term from the first payment due date.

Option 4 - 30 Year Fixed Rate Payment
This is the fully amortized payment based on a 30-year loan and is calculated each month based on the prior month's interest rate, loan balance and remaining term. The biggest advantage to this payment option is that the payment pays all of the interest due and reduces your principal.

It is right for you? Ask yourself...

• Are you comfortable with just paying a minimum payment understanding that your loan balance may grow?
• Do you fully understand the concept of a minimum payment and how it relates to negative amortization?
• Do you possibly foresee needing a home equity loan in the future? If so, you need to learn more about how Negative Amortization can hurt your ability secure a home equity line.

Ask Your Lender...

• What Index is used? This will help you determine what financial index is used as a base for calculating your interest rate. Such indices include MTA, COFI, COSI and the LIBOR index.
• What is the Margin? By adding the margin to you loan's current index rate you can know calculate what the real rate of interest is for the loan program in today's market.
• Can You Make Extra Principal Payments? Be very careful and make sure you ask this question. Mortgage lenders and brokers earn quite a large sum of money for attaching a prepayment penalty to these programs so if you are against having a prepayment penalty make sure you take the time to ask. (Most lenders will allow you - even with the prepayment penalty - to still pay up to 20% a year without triggering the penalty clause).

Is a Jumbo Mortgage Your Best Choice?

A Jumbo Mortgage (or Jumbo Loan) is a home loan that simply exceeds the published conforming loan limits set annually by Fannie Mae (also known as FNMA or the Federal National Mortgage Association). The current conforming loan limit for 2007 for a single family residence is $417,000. Although these limits did not change in 2007 from the prior year it is very common to see a slight increase annually. Other property type limits include:

• 2 Family - $533,850
• 3 Family - $643,500
• 4 Family - $801,950

These new limits are effective for all home loans closed on or after January 1, 2007. Additionally, these maximum loan amounts are 50% higher for Alaska, Hawaii and the U.S. Virgin Islands.

Super jumbo loans have become increasingly popular due to rising home prices and many lenders recognize the need for such financing. The term Super Jumbo Mortgage is used to define mortgage loans exceeding either $650,000 or $1,000,000 - depending on the lender. This term was previously used as an industry standard for all loans over $650,000 however in today's world it's really up to the lender to define what is considered a super jumbo loan according to their lending matrix. However, the minimum loan is still $650,000. Consumers should expect slightly higher rates, stricter down payment requirements and less product options for home loans in this range.