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Fixed rate Loans
Fixed rate loans have been the most prevalent
form of financing since the modern mortgage was introduced
after the Great Depression. This traditional favorite
offers a set payment for a period of time – generally
30 years, but the repayment period could be set for
15 years, 20 years, or even 40 years. The longer the
period for repayment, the lower the monthly payment
will be. Remember, however, the longer the repayment
period, the more interest you will pay as well.
1. Extendible Balloon’s (7/23
and 5/25’s)
A newer version of the fixed rate mortgage
is the 7 or 5 year extendible balloon loan. This loan
allows the borrower to have a lower interest rate for
the first few years of the loan and therefore qualify
for a more expensive home, yet gives the homeowner the
predictability of a fixed rate loan. The loan is set
at a lower interest rate for the first seven (or five)
years of the repayment period, and then the interest
rate is adjusted to fit market conditions at that time.
The rate will then be reset for the remaining 23 or
25 years of the loan. Lenders offer this type of loan
in part because statistics show that few homeowners
remain in a home for more than five to seven years before
moving or refinancing their loan. The saving in interest
is usually in the range of ½% from a comparable 30 year
fixed rate loan. The downside is that the lender may
reserve the right to call the loan due at the end of
the initial period if certain conditions are not met.
2. Buydowns
A lender funded buydown gives the homebuyer
an initially lower interest rate which will gradually
increase to an agreed upon fixed rate over a period
of two or three years. For example, if the market rate
is 8%, the note rate of the loan might be set for 8.5%.
But the homebuyer would only be charged 6.5% for the
first year of the loan, and 7.5% for the second year
of the loan. In years 3-30 the interest rate would be
the 8.5% note rate.
This loan gives homeowners the advantage
of a lower monthly payment for the first two years of
the loan when extra funds may be needed for furniture
and other needs. It also gives the homeowner the comfort
of knowing that even though the rate does change during
the first three years of the loan, the rate is fixed
from year 3 forward.
3. Bi-weekly Mortgage
If saving on total interest cost on a
loan is important to you, the bi-weekly mortgage may
be the option for you. It will allow a 30-year mortgage
to be paid off in 18 to 19 years, by requiring a payment
for one half the monthly amount every two weeks. The
bi-weekly payment increases the annual amount paid by
about 8% and in effect makes 13 payments a year (26
bi-weekly payments.) The shortened loan term decreases
the total interest cost substantially. The interest
cost for a bi-weekly mortgage is decreased even further,
however, by the application of each payment to the principal
upon which the interest is calculated every 14 days.
By nibbling away at the principal faster, the borrower
saves additional interest. Most lenders who offer this
mortgage will allow the homebuyer to convert to a more
traditional 30-year loan without a penalty.
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Adjustable
Rate Mortgages (ARM’S)
Adjustable Rate Mortgages have become
one of the most popular and effective tools for helping
people become homeowners. They were created at a time
of high interest rates that kept many people out of
the housing market. The ARM offered a lower initial
rate by sharing the future risk of higher rates between
the borrower and the lender.
ARM’s can be an excellent choice
of financing under certain conditions, such as rising
income expectations, high interest rates or an expectation
of short-term home ownership. But because payments and
interest rates can increase, either steadily or irregularly,
homebuyers considering this kind of mortgage need to
have the income to keep up all possible rate and/or
payment changes.
Each ARM has six basic components.
1. Initial Interest Rate, which
is typically one to three percentage points lower than
that of most fixed rate mortgages. It is the lower interest
rates that make ARM’s somewhat easier to qualify
for. The initial interest rate may be set for one month,
three months, six months, one year, three years, five
years, seven years or even ten years. The longer the
start rate is guaranteed for, the higher the rate will
be.
2. Adjustment Interval: The time
between changes in the interest rate and/or monthly
payment. The interest on ARM’s will be fixed for
a set period of time before they enter into the adjustment
period. After the initial period, the loan will generally
adjust annually for the balance of the 30-year term.
3. Index: Simply put, the index
is the price the lender has to pay to get money to lend.
Lenders may use the 1-year T-Bill, the cost of CD’s,
the Federal Reserve Cost of Funds, the Prime Rate, or
the LIBOR (London Interbank Offered Rate) to obtain
their funds. The 12-month average of the index figure
is one factor taken into consideration when an ARM is
adjusted.
4. Margin: This is essentially
the lender’s profit margin and it is added to the
index to get the "fully indexed" rate at the
time of each adjustment. A margin of 3 or less is usually
considered an A paper loan. A margin of more than three
is reflecting the risk factor that the lender perceives
in the loan. The margin is a key figure in analyzing
comparable adjustable rate loans. The lower the margin,
the lower the interest rate will be over the life of
the loan.
5. Annual Cap: This is the limit
on how much the interest rate can fluctuate either up
or down at each adjustment date. Typically, this is
limited to 1% each 6 months, or 2% per year for annual
adjustments.
6. Life Cap: This places a limit
on how high your interest rate can go over the life
of your loan, and is added to the start rate. A 5% lifetime
cap would equate to a lifetime ceiling on a loan of
5% over the start rate.
Most adjustable rate loans fully amortize
over the 30-year term of the loan. Some ARM’s,
however, offer variations on full amortization. These
include:
1. Interest Only Loans: These loans
allow the borrower to make interest only payments for
the initial period of the loan. At the end of the initial
period, the loan will then amortize for the remaining
years of the loan.
2. Deferred Interest Loans: These
loans allow the borrower to make a choice with each
payment on how to repay their loan – either fully
amortized, interest only, or utilizing a minimum payment
feature, in which case the interest is not fully covered
by the payment, and is deferred to the end of the loan.
These ARM’s have initial payments that are guaranteed
for one year, but the start rate may only be guaranteed
for 3 months. After 3 months, if a borrower makes the
minimal guaranteed payment, the loan balance will increase
by the difference between the interest charged and the
monthly payment. The deferred interest feature is not
inherently negative, because loans with this provision
are entirely within the borrower’s control on a
monthly basis. It can be extremely beneficial for borrowers
whose income has cash flow fluctuations, as they have
the ability to make a lower monthly payment when the
need arises.
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Home Equity Loans
or Second Mortgages
Utilizing a piggyback combination of a
first and a second mortgage or home equity line can
be an excellent way to obtain a low down payment loan
without the need for mortgage insurance. The combined
payment is often less than a payment with mortgage insurance.
And a larger portion of the combined payment is tax
deductible as well! Let us show you the possibilities
this strategy has to offer in maximizing your tax advantages
and keeping your investments working for you.
These mortgages can also be wonderful
tools for completing home improvements, consolidating
bills, or buying a new car, RV, or boat.
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Custom Construction
Loans
Custom Construction loans are a bit more
intricate than standard loans, but we have the experience
to handle them with ease.
Construction programs are based on fixed
rate programs, one-year ARM’s, three-year ARM’s
and five-year ARM’s. You will be charged interest
only for the duration of the construction period, then
the payments will convert into a fully amortizing loan
for the balance of the loan term. They tend to carry
higher closing costs, as lenders will charge an additional
custom construction loan fee, as well as fees to cover
each inspection during the construction period.
The lender will evaluate your credit information
as they would in any mortgage loan application. In addition,
the builder will be required to provide current financial
information and a current credit report. Your contract
with the builder will need to be reviewed as well.
An appraisal will be done from the plans,
specs and cost breakdown for the home. When the building
permit is issued and the final loan commitment is received,
the loan is ready to begin funding draws. Draws will
be made jointly to you and the builder based upon monthly
inspections made by the lender.
Here is a check list of Construction Information
that will be needed:
- Building plans
- Cost Breakdowns
- Description of Materials
- Contract
- Plot Plan
- Septic or Well Information
- Lot Purchase Information
- Receipts for any Lot Improvements
Builder Information includes:
- Business Financial Statement dated within past 6
months
- Personal Financial Statement dated within past 6
months
- Most recent two years tax returns
- Business credit report
- Personal credit report
- Resume
Since many builders have long standing
relationships with many of the lenders, an update may
be all that is necessary.
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