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The mortgage
market is huge, providing hundreds of products to
borrowers. This section will address many of the common
products available, but the list is not comprehensive.
If you have a need we haven’t listed, contact one of our
Loan Officers for additional information.
Homebuyers are
understandably concerned about interest rates, but most
homebuyers underestimate the importance of choosing the
right mortgage. A loan that is customized to your needs
can provide huge savings, while choosing the wrong
mortgage can be very expensive.
Fixed-Rate Products
These are the most popular mortgages. Your rate is fixed
for the entire term of the loan. You may select 10, 15,
20, 25, and 30 year loans. Fixed rate products are
available in Conventional, FHA, and VA loans.
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Advantages:
Very stable; principal and interest never change for
the life of the loan. (Only taxes and insurance may
change.) Good choice for those who plan to keep the
loan for a long time and need a stable payment.
Especially attractive when interest rates are low.
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Cautions:
Borrowers who plan to have the loan for only a few
years could save money with an adjustable rate or
balloon mortgage.
Adjustable-Rate Products
Popular for people who plan to move or refinance in the
foreseeable future. Also popular for people who desire a
lower interest rate, or who want to increase the amount
of their loan qualification. These loans become more
popular as the interest rates rise.
There is a wide
variety of adjustable rate loans (ARMs). For example, a
1/1 ARM means the initial rate is guaranteed for one
year, and the rate adjusts every year thereafter. You
may prefer to choose a 3/1 ARM, where the initial rate
is guaranteed for 3 years, then adjusts every year
thereafter. Depending on the loan you choose, you may be
able to select from the following menu: 1/1, 3/1, 5/1,
7/1, 10/1. All these loans are typically based on a
30-year amortization.
Your ARM may
have a convertible feature that for a fee turns your
adjustable rate into a fixed rate mortgage at your
request. ARMs also have “caps” and “floors” that
determine the maximum adjustment as well as the minimum
and maximum rates for the life of the loan. For more
information on ARMs,
click here.
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Advantages:
Increases level of qualification. Provides lower
initial rate than a fixed-rate loan. Subsequent rates
may be lower if interest rates decline.
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Cautions:
Ensure you can afford a “worst case” scenario if rates
increase.
Balloons
Very similar to fixed rate mortgages with two important
differences. A loan with a balloon payment must be paid
or refinanced at the end of a loan term, and the loan is
not convertible.
You’ll typically
find balloons for 5 and 7 years. Both loans are based on
a 30-year amortization, but the balance at the end of
the loan term must be paid or refinanced.
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Advantages:
Increases level of qualification. Provides lower rate
than a 30-year fixed rate loan.
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Cautions:
Ensure you can pay the loan off or you have the
ability to refinance at the end of your loan term.
Buy-Downs
Don’t confuse the buy-down feature with “buying down”
the rate. Though similar sounding, they are entirely
different. Buying down the rate refers to the common
practice of paying discount points to obtain a rate
lower than the listed rate. (See
What’s the Best Rate for Me?) A “buy-down” is a
temporary reduction in rate for a specified time. A 2/1
buy-down means the rate for the first year of the
mortgage will be 2% less than the actual note rate, and
the rate for the second year will be 1% less than the
note rate. In the third year and subsequent years the
borrower will pay the actual note rate. For example, a
borrower with an 8% fixed rate loan with a 2/1 buy-down
will have an interest rate of 6% the first year, 7% the
second year, and 8% for all years thereafter.
There are
numerous combinations for buy-down options, but the most
common are the 2/1 and the 3/2/1. In some cases the
borrowers can combine an adjustable rate with a
buy-down. The low first-year rate on an adjustable-rate
mortgage, combined with a 3/2/1 buy-down, can produce a
very low rate the first year of the loan. Remember,
however, that subsequent years of the loan will be
subject to both the buy-down adjustment and the
adjustable rate adjustment. For more information see
Creative Uses for a Buy-Down.
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