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Always
remember that the actual
effective interest rate paid
depends on the number of
years a loan is kept and is
computed as follows: Note
rate + (points/8) =
Effective Interest Rate. If
for example buyer intents to
occupy a property for three
years should avoid paying
points since it will take
almost six years to be able
to recapture what he paid.
It is preferable sometimes
the borrower to ask the
lender to raise the interest
rate in order to avoid
paying discount points and
origination fees.
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Fixed- Rate Mortgages:
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A
fixed rate mortgage is
called a mortgage that
precludes a change in
the interest rate
throughout the entire
duration of the loan.
Some of the mortgages in
this category include
the traditional 30-year,
the 20-year, the
15-years and even the
10-year mortgage. There
are also bi-weekly
mortgages which shorten
the life of the loan by
monthly payment every
two weeks.
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A fixed rate mortgage is
good for you if:
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You decided on
living at your
new home for a
long term period
of time.
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You are someone
that likes
stability on
your monthly
household
budget; and does
not have to
worry about
changing payment
amounts or
interest rate.
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30- year Fixed Rate:
Advantages:
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Used in a great extend
by first-time buyers
since is the most common
and the easiest to be
approved.
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It
has the lowest monthly
payments compared to the
15-year and the
bi-weekly loans which
could be ideal on a
tight household budget.
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Provides stability on
future increases in
interest and inflation
rates.
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Provides the maximum
interest deduction for
income tax purpose.
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Disadvantages:
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In the
event of a drop in interest
rates the fixed rate
mortgage will not drop to
reflect the lower market
rates. A homeowner will need
to refinance i.e. repay the
original loan and proceed on
a new loan with the lower
interest rate. As a result
the borrower has to pay a
substantial amount of money
on closing costs.
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15 Year Fixed Rate:
Advantages:
|
Similar with the
30-year, the 15-year
mortgage has mortgage
rates that throughout
the life of the loan do
not change so as the
monthly principal and
interest.
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Usually the 15-years
mortgage has lower
interest rates than the
30-year. When lenders
get their money faster
means less money is
borrowed for less time
and less interest is
paid over the life of
the loan (approximately
50 percent less).As a
result the interest
rates are slightly lower
which results in forced
savings and faster
equity buildup.
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Disadvantages:
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Flexibility may be lost
since higher monthly
payments might not allow
the borrower to take
advantage of future
investment
opportunities.
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Tax advantages related
to home mortgages and
investment opportunities
are lost.
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There is a risk in the
event of future increase
in income tax rates to
increase the mortgage's
net costs.
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Biweekly
Mortgage:
Advantages:
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It
combines the benefits of
the 30-year and 15-year
mortgage since it is
amortized over a 30-year
period and with payments
made every two weeks but
without the higher
payments of the 15-year
loan.
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Many times you can
change with an advance
notice the biweekly to a
traditional 30-year
fixed rate.
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Disadvantages:
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It
threatens borrowers with
no stable income or
savings and checking
accounts.
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Locks borrowers into
payment plans that could
setup themselves at
their own discretion.
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Adjustable
- Rate Mortgages:
Developed during a
period of high interest rates, can
help prospective home owners to
achieve their dream home ownership.
The adjustable rate mortgage (ARM)
becomes noticeably more popular when
interest rates rise and loose
popularity when interest rates fall.
It allows lender to increase or
decrease interest rates depending on
changes of a specified index.
Choosing an
ARM that has an index that reacts
quickly allows you to take full
advantage of falling interest rates.
On the other hand an ARM that lags
behind the market lets you take
advantage of lower interest rates in
an event of an upward movement. In
addition ARM usually contain certain
consumer safeguards such as interest
rate caps, which limit the amount
that an interest rate can fluctuate.
This prevents future rising in
interest rates and helps the
homeowners to maintain an affordable
mortgage payment.
Something to
remember is that both Fannie Mae and
Freddie Mac on transactions with
less than 20 percent down on
one-year, require being qualified at
the initial interest rate plus 2
percent.
Other options that
need to be asked when shopping for
an
ARM are:
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If a
possible transfer of the
mortgage to a new home
buyers is allowable and
whether or not the same
terms can be applied if the
new home buyer qualifies for
the loan. |
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If the
ARM could be converted to a
fixed rate mortgage at a
predetermined period,
locking in a lower interest
rate. |
Balloon Mortgages:
They are short
term mortgages that provide a level
payment feature during the term of
the loan. They have similar features
as a fixed rate mortgage but the
loans do not fully amortize over the
original term. The maturity types
could vary and first time mortgages
usually have a term of 5 to 7 years.
At the end of the loan term the
remaining balance has to be paid in
full and this could be accomplished
by refinancing.
FHA Mortgage:
FHA is a
mortgage program in which Federal
Housing Administration loans are
backed by the U.S. government; which
means the lender is reimbursed by
the federal government in an event
of default by the borrower. FHA is
great for first time buyers since
its primary benefit is to enable
home buyers to purchase a loan with
a minimal down payment. Typically,
only 5 percent is needed instead of
the 20 percent down payment to
secure a conventional financing. The
amount of the loan is usually based
on the average cost of housing
within a specific geographic area;
thus a borrower that leaves on a
larger metro area with higher
housing prices can get a higher loan
compared with a buyer in rural area
and lower housing cost. FHA requires
a purchase of a mortgage insurance
premium ( MIP) which is usually an
up-front of 1.50 percent that could
be finance into the loan amount and
is paid at closing. One of FHA
benefits is that the down payment
can be 100% gift funds without the
need of verification of the source
of the gift. Proof of deposit in the
borrower's bank or savings account
prior to underwriting approval is
required. In the event of full
repayment of a loan backed by FHA
you may have money owed to you. In
that case you could call a toll free
number 800-697-6967 for claims.
VA Mortgage:
VA is another
government program, which is
designed primarily to enable
qualifying veterans to buy a home
with no down payments and minimum
closing costs. Who is eligible are
veterans who served on active duty
during World War II,
Vietnam era, Korea and Persian Golf
conflict. They must have at least 90
days active service during war time
and 180 days active service during
peace time to be
eligible VA
loans could be used to buy a new
home or condo, built a new home,
purchase and improve a home,
refinance or buy a manufactured
home. A VA loan has no monthly
mortgage insurance premium and can
be prepaid with no penalty.
Mortgage Tip: and Solutions:
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In a preconstruction
transaction consider
a loan with longer
interest-rate
guarantee. Since
projects now take
longer to build the
six months cap can
be replaced by loans
which offer 12 month
rate protection. |
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In a situation
that you need a
year or too
breathing space,
before start
making full
payments, a
fixed-rate loan
with an initial
buy-down can
give you the
advantage of
lower mortgage
payments for a
short period of
time. The
interest rate
is even lower
than that of an
ARM.
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If the need of cash
flow is as important
as building equity,
a short-term
adjustable ARM of
seven to ten years
can allow you
interest only
payments when extra
cash needed. Short
term ARMS are very
competitive with
fixed loans. |
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You are an
investor that is
buying a four-plex
and your
guidelines do
not fit into
Fannie Mae or
Freddie Mac
requirements an
Alt-A mortgage
could be the
solution. A
secondary market
is established
and now
mortgagors are
more willing to
lend loans of
$400,000 and up
at a prime or
sub prime rates.
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If you need a lower
monthly payment and
like the security of
a traditional fixed
rate mortgage, a
40-years fixed-rate
loan could be the
answer. |
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