- Your current financial status.
- How you believe your finances will change over time.
- How many years you plan on keeping your house/land/income-property.
- Would you be comfortable if your mortgage payment changed over time?
If you are ready to purchase property or land, you should contact a mortgage professional to discuss your finances, future plans, and the amount of risk you want to take. Below are some basic loan options and information on how they work.
Fixed Rate Mortgages
When buying a home, you will have to decide what kind of mortgage will be right for you. A fixed rate mortgage is the most common type of mortgage with a variety of options available. With a fixed rate mortgage you can choose from a 30 year, 20 year, 15 year, or 10 year loan.
There are two distinct features of a fixed rate mortgage. The first is that the interest rate will remain fixed for the entire duration of the loan. This means that even if your property taxes or homeowner’s insurance increases, your monthly mortgage payment will stay the same. The second is that the payments for the loan are structured so that you will repay the entire loan by the end of the term. At the beginning of your term, most of the loan payment will be used to pay the interest on the loan. As time goes on, your payments will start paying for more of the principal amount. Both the 15 year and 30 year mortgages are the most common fixed rate loans.
Standard ARM Loans and the Differences Between Them
ARM loans, or Adjustable Rate Mortgages, are considered to be more risky of an investment. However, there are a few options that may work for your particular needs. With an ARM loan, interest rates and monthly payments can be different based on adjustments to the index rate of the loan. If you purchase an ARM loan that has an index that reacts quickly, you can take advantage of falling interest rates. If you buy an ARM loan that lags behind, you can take advantage of lower rates for a brief period of time while current market rates are rising. There are a few basic types of ARM loans but be sure to talk to a professional before deciding if this loan is right for you.
6 Month Certificate of Deposit (CD) ARM
In this program, the loan has a maximum interest rate adjustment of 1% every six months. These loans can react very fast to movements in the market.
1 Year Treasury Spot ARM
In this program there can be an interest rate adjustment of 2% for every 12 months of the loan. This type of loan can react faster than the Treasury Average index, however, it is slower than the CD index.
6 Month Treasury Average ARM
This loan program typically reacts slower in fluctuating markets so adjustments in the ARM rate will lag behind some other indicators. This program offers an interest trade adjustment of 1% every six months.
1 Year Treasure Average ARM
Similar to the Treasury Spot ARM, this program has a maximum interest trade adjustment of 2% every one year. This type of program typically has a slower reaction in fluctuating markets. This allows for adjustments in the ARM rate to lag behind other indicators.
A balloon mortgage is a loan that does not completely amortize over the original term of the loan. The typical balloon loan has a term of 5 to 7 years and when it comes to maturity, there is typically a remaining balance that needs to be paid of or refinanced, if allowed. These types of mortgages are more common in commercial real estate rather than residential real estate due to its large size. Often, companies also have a conversion feature at the end of the Balloon term. One example of this would be if a balloon loan was coming up for expiration, the loan may convert to a 15 or 30 year fixed loan plus a percentage point in surplus of the loan. The balloon mortgage with a conversion option is often called a 7/23 Convertible or a 5/25 Convertible.
Cost of Funds Index
A cost of funds index, or COFI, is weighted average fund. A COFI calculates a variable rate loan by averaging the regional average of interest expenses incurred by financial institutions. There are two types of funds for each side of the country. In the eastern states this type of fund is commonly referred to as the 1-Year Treasury Security. In the western states the Cost of Funds Index is typically prevalent with the 11th District Cost of Funds.
Interest Rate Buy Downs
With this type of loan, you are paying to buy down the rate, which can, in turn, lower your monthly mortgage payments. One point is equal to 1% of your mortgage amount. In an interest rate buy down, a buyer typically pays 3 points above the current market in order to pay an interest rate below the market during the first two years of the loan. Then at the end of the two year term, the buyer would then pay the old market rate for the rest of the loan term. This is the most common buy down, called the 2-1 buy down.
Different mortgage companies offer different variations of buy downs based of off older buy downs. Instead of charging higher points to the buyer at the start of the loan, they increase the loan to cover yields in later years. The 3-2-1 buy down is another typical buy down. This method works similarly to the 2-1 method. The difference is that with this note, the interest rate starts at 3% below the present loan rate.