Loan Center

In the past few years the Mortgage Industry has experienced many changes, the biggest being loan products. I believe that it is important to know what your options are when considering purchasing a new home or refinancing a current home. I have listed several loan products below, some of them are very well known others are newer to the industry. Take a look at what is available and find the program that suits your personal financial needs the best. If you should need additional information on these products feel free to contact me to discuss a specific loan program in detail.

Fixed Rate Loans: Loans in which the interest rate is fixed throughout the entire term of the loan. Normally the terms are 30 year, 15 year and 20 year. Some lenders do offer a 7 year term at a small cost.

ARM Loans: A.R.M. stands for Adjustable Rate Mortgage. The interest rate on these loans can change on specified dates per the loan contract. The loan has a maximum percentage it can change per adjustment as well as a lifetime percentage increase, these rate changes also know as “caps”. For example; if you chose a 1 year A.R.M with 2/2/6 caps, this means that your interest rate could change once a year on the anniversary date of the loan and the interest rate cannot increase more that 2% on the first adjustment and no more that 2% per year after that, with a maximum lifetime increase of 6%. Keep in mind that these are worst case scenarios and the rate changes could be less than the 2%. The advantage to an A.R.M. is that the beginning or start rate is often much less than a fixed rate loan. The drawback is not knowing what interest rates will be in the future and a potential for increased mortgage payments.

3/1, 5/1, 7/1 ARM loans: These loans work under the same guidelines above but with one exception, the first number represents a fixed rate for that specified number of years. So if you chose a 3/1 ARM your interest rate would be locked in for the first 3 years at a fixed rate and on the anniversary date of your loan beginning with the 4th year your interest rate would adjust according to the loan contract. These are some of the most popular ARM loans available. The reason is the consumer is offered a lower start rate than a full 30 year fixed and it is locked for a specific period of time so there is less risk than a yearly ARM. For consumers who are planning to relocate, upgrade their current home or expect a significant increase in income over the next few years, these loans offer lower mortgage payments and allow the consumer to qualify for more. The drawback is if you plan to be in a home for a long period of time, there is the potential of higher interest rates in the future and an overall increase in mortgage payments after the initial fixed rate period.

Home Equity Lines of Credit or HELOCS: These loans are normally used as Second Mortgages however First Mortgages are available as well. These loans are based on Prime Rate and are variable in nature. This means that whenever the prime rate changes, the loan rate changes, there is no dedicated adjustment period. The loan is normally structured as an interest only loan for the first 10 years then rolled over to a fixed 15 year loan at whatever rates are at that time. These loans are very popular for home improvement, investment property or purchase money transactions. The advantage is a low monthly payment; you can pay the loan balance down then draw funds out again during the first 10 years of the loan and it is a great tool to purchase investment properties. The drawback is the rate can change at anytime and if you just make the minimum payment your balance will never decrease.

Interest Only Loans: These loans are newer to the Mortgage Industry. As Real Estate prices continue to rise, finding affordable housing is becoming a challenge for new and repeat home buyers. These loans offer consumers a way to purchase more home with less money. The basic Interest Only loan is where the consumer pays a fixed rate for the entire loan but the first 5 or 10 years they are only required to pay the interest on the principle balance. Should the consumer pay more than the minimum payment, at the end of the 5 or 10 year period the loan is recaptured or restructured to reflect any principle payment made then the loan converts to a 25 or 20 year loan term. These loans are also offered as Adjustable Rate Mortgages with the same guidelines as above along with the interest only feature. The drawback is unless you pay towards your principle within the first 5 or 10 years, you will be stuck with a larger mortgage payment at the end of the interest only period. Keep in mind that as long as the real estate market stays strong, you can offset the lack in principle payment with property appreciation. The average homeowner refinances every 3 to 5 years and upgrades every 5 to 7 years.

Option ARMS: Option ARM loans are some of the most versatile and flexible loans available in the Mortgage Industry, they can also be very dangerous to the uninformed consumer. There are many lenders that offer the Option ARM and the program will vary from lender to lender. These loans normally offer 4 payment options: the first is a partial payment; the second is an interest only payment, the third a 30 year fixed payment and the fourth is a 15 year fixed payment. These loans are variable rate loans and the interest changes monthly.

At the beginning of the loan you have a low start rate of 1.95% or something similar and your payment is guaranteed to be the same for the first year. However, the interest rate will continue to adjust each month. At the end of the first year, your loan will re-calculate and your payment may go up as much as 7% of the original payment. The change in interest rate and payment depends on how the interest rates do and how stable the Index has been over the past year. As the interest accrues, if it is not paid beginning with the first month of the loan, it will be added to the principle balance thus you could actually owe more on your loan balance than what you started with. This is called Negative Amortization. This is the biggest downfall of this loan product. How much interest accrues is based on what payment option you choose and how long you keep the loan. Most loans have a maximum the balance can increase, some are a 110% of the principle balance others are 125% of the principle balance. The other draw back is that if you decide down the road you would like to take out a Home Equity loan, most lenders will not approve an equity loan behind this type of first mortgage or the lender will require using the maximum amount the loan could grow (110% or 125%) thus absorbing all of the existing equity.

The positive side of the Option ARM is flexibility. If you are a business owner and would like to create a larger cash flow, a consumer looking to purchase investment property or a home buyer who is looking to upgrade in a short period of time while keeping your overhead to a minimum, this is an ideal tool. It is a short term loan, say for 3 to 5 years or so but I do not recommend these loans long term. With interest rates on the rise, there is no guarantee where they will be in the next 5 years. If this is a program you may be interested in, speak to a mortgage professional to get the exact details on how it will affect you and your financial situation.