Fixed Rate Mortgage

This is the most common type of residential home loan. The mortgage loan is repaid through fixed monthly payments of principal and interest over a set term. The borrowing rate stays the same over the life of the residential mortgage loan. The term of the home mortgage can be 10, 15, 20 or the popular 30 year fixed rate mortgage term. The way fixed mortgage loans are structured, the mortgage interest is front loaded. In the first years of the residential loan, the bulk of the monthly payments go to paying mortgage interest. It’s only later that you will start significantly building equity in your home as more of your mortgage payments go towards paying down the mortgage loan principal. A fixed rate mortgage is ideal for those who intend to stay in their properties for a long time.

The Advantages

Stability: With your mortgage rates fixed, the loan period set, you know what your mortgage payment will exactly be for the whole life of the residential loan. Given the certainty of your mortgage loan payment, you can plan your finances accordingly.
Lower payments in a low mortgage interest rates environment: A lower monthly mortgage payment frees up your purchasing power and gives you greater financial flexibility. Using a 30 year fixed mortgage of $150,000 as an example, if the borrowing rate is 6.50%, the monthly payment would be $948.10. If the mortgage interest rate is 8.50%, the mortgage monthly payment would amount to $1,153.37. The difference in monthly payments is $205.27.

The Disadvantages

Affordability: If mortgage interest rates are high, you might have difficulty making the high mortgage payments. The home loan in this situation might not be approved.
High payments in a high mortgage rate environment: Nobody wants to be saddled with high home mortgage payments over the long term. When borrowing rates are lower, you can refinance your mortgage. A refinance mortgage is the process of replacing your current mortgage with a new residential mortgage with better borrowing terms.

The Adjustable Rate Mortgage (ARM)

The adjustable rate mortgage is usually referred to as an ARM. An arm adjustable rate mortgage is a combination of a fixed rate mortgage and a floating rate mortgage. At the beginning of the mortgage term, the mortgage rate is fixed for certain periods. These periods could be for 3, 5, 7 or 10 years. After this period expires, the mortgage interest rate becomes adjustable.

A popular ARM home loan is the 5 1 ARM Mortgage. Five denotes that the period and the borrowing rate are initially fixed for 5 years. After the fifth year, the mortgage rate becomes

Conversion Options: Some ARM home loans come with options to convert them to a fixed rate mortgage based on a pre-determined formula, during a given time period. Example: the 1-year treasury bill adjustable may be converted to a fixed mortgage rate during the first five years on the adjustment date. Meaning, you have the option to convert during the 13th, 25th, 37th, 49th and 61st months of the mortgage loan.

Components of an ARM Adjustable Rate Mortgage

There are several components that go into calculating the adjustable rate of an ARM mortgage.

Index: This is the market derived interest rate which is used as a base to set future rates of the ARM mortgage loan. Depending on the index chosen, the home borrowing rate could be adjusted monthly, quarterly, semi-annually or annually. The index could be pegged to the following: Treasury Bill Rates, The Prime Rate, Libor and 6 month CD. These indexes are usually published in the newspaper.
Margin: This is the spread added to the index to determine the actual rate charged to the mortgage borrower. Example: Index is based on One Year Treasury Bills 3%. The margin is 2%. The mortgage rate the borrower pays is 5%. Rate = Index Rate + Margin
Adjustment Period: This is the duration for which the mortgage interest rate is fixed. If the adjustment period is one year, then the interest rate will remain fixed for one year, after which time it will adjust.
Adjustment Cap: This is the maximum the interest rate can adjust either up or down for each adjustment period. Example: The adjustment cap is 1 point. The index based interest rates since the last adjustment period went up 1.5 points. The most you will be paying would be 1 point due to the cap.
Lifetime Cap: The maximum mortgage interest rate charged over the duration of the arm mortgage loan. The cap can be as high as 6%. The cap is based on the interest rate from the first year adjustment period. The rate is 5%. The highest the mortgage interest rate can go is 11% (Base Rate + Lifetime Cap).

The Advantages

Teaser Rate: This is the starting interest rate of the arm adjustable rate mortgage. It is usually referred to as the teaser rate, since it is lower than the fully indexed rate. The initial low mortgage rate is used to attract people. An arm mortgage is ideal for people who intend to stay in their homes for no more than 5 to 7 years. The benefits of an arm are realized at the beginning.

Affordability: If current mortgage rates and housing prices are high, this may be the only home loan option available to you. You may have a better chance of getting the home loan since the lender incorporates the gross monthly income and the monthly loan payment amount to determine how much you qualify. The monthly amount will be less with a lower interest rate so you might qualify for more.

Interest rates have peaked: By going with an adjustable rate mortgage arm at the peak of the interest rate cycle, the successive rates will be lower as interest rates go down. Your monthly home mortgage payments will be lower.

The Disadvantages

Complicated to understand: Unlike a fixed rate mortgage that is simple to understand, there are many variables that go into calculating adjustable rate mortgage loans.

Interest rates have bottomed out: By going with an adjustable rate mortgage arm at the bottom of the interest rate cycle, successive borrowing rates will likely go higher as interest rates go down. Your monthly mortgage payments will become less affordable.

Uncertainty: If you plan to be at your property for more than 7 years, you will be dealing with the uncertainty associated with an ARM mortgage. After each adjustment period, you will bet getting new mortgage payments.

Interest Only Mortgage

An interest only home mortgage features no payments of principal made at the beginning of the home loan. The monthly payments consist only of mortgage interest only. Due to the lower monthly mortgage payments, you qualify for a bigger residential loan. An interest only home mortgage allows you to buy more home while keeping your monthly mortgage payments low.

Not Interest Only For The Whole Mortgage Loan Term
The interest only payments do not go on for the whole term of the home loan mortgage. Interest only mortgage payments periods range from 1 year up to half the term of the mortgage loan. Interest only loan mortgages are available in adjustable rate mortgage format and fixed mortgage format.

Bigger Monthly Mortgage Payments
After the interest only payment is over, you will begin making payments on your mortgage principal. Your monthly mortgage payment will go up considerably. For example, you took out a 15/30 year interest only mortgage. After the 15th year, the principal balance will be amortized over 15 years. With a $175,000 home loan with a mortgage borrowing rate of 6.50%, the interest only monthly payment is $947.92. When the principal payments kick in after the 15th year, the mortgage monthly payment jumps to $1,524.44.

The Advantages

Lower mortgage payments: The lower monthly mortgage payments let you purchase a home where a fixed mortgage loan would not. You get to jump on the housing bandwagon

Free up cash to invest the money elsewhere: Instead of using the cash to pay down your mortgage principal, you can invest in other vehicles such as stocks and mutual funds to generate a superior return.

The Disadvantages

Income Risks: There are no assurances that your income will rise fast enough to cover the higher monthly mortgage payments.

Property Risks: Instead of the property rising fast enough to pay off your interest only home mortgage, it could stay at current levels or even drop. As a result, you might require another loan just settle the interest only mortgage loans.

No guarantee of getting superior returns in other investments: If you used the money to generate returns in investments such as equities and mutual funds, there is no guarantee you’ll make money.

Biweekly Mortgage

Mortgage payments are made every two weeks. The amount paid is half of what your monthly mortgage payment would be. On an annualized basis, there are two extra payments in a year. You will be making 26 biweekly mortgage payments instead of 24 payments.

Save Thousands On Mortgage Interest And Pay Off Your Mortgage Quicker
A bi weekly mortgage program has you paying down your principal mortgage earlier. As a result, you’ll save significant amounts in mortgage interest and pay off your home mortgage years earlier.

Example: 30 year fixed mortgage $175,000 Interest Rate: 6.75%

By opting for a bi weekly mortgage payment plan for this mortgage, you will be saving $54,257.52 in mortgage interest. Your mortgage will be paid off 5 years 9 months earlier.

Two Step Mortgage

A two step mortgage is essentially a 30 year mortgage with special features: Convertible or non-convertible. These mortgage loans are also known as 5/25s and 7/23s. The 5/25s has a fixed interest rate for the first five years and then switches to either a 25 year fixed mortgage rate or a 1 year adjustable mortgage rate. The 7/23 has a fixed interest rate for the first seven years and then converts to a 23 year fixed or a 1 year adjustable. The starting home loan rate is lower than a 30-year fixed. However, it is higher than a 1-year ARM mortgage. This type of residential mortgage is less risky than a mortgage ARM initially since the adjustment interval is longer.

Federal Housing Authority (FHA) Mortgage

A FHA mortgage is a residential loan insured by the FHA that is part of the U.S. Department of Housing and Urban Development (HUD). FHA loans have lower mortgage down payment requirements and were easier to qualify for than conventional loans. The goal of the FHA is to make housing affordable and stimulate demand.

The best feature of an FHA loan is the low downpayment. The down payment mortgage can be as low as 2% but you will be required to pay pmi private mortgage insurance. FHA loans are also assumable so you can take over from the property seller if you qualify. This could save you significant amounts of money and hassles. The FHA mortgage loan amounts are determined by the median prices of different cities within a specific region.

Veterans Affairs Loan

The U.S. Department of Veterans Affairs guarantees mortgage loans for veterans and service persons. It does not underwrite the residential loans. The guaranty allows veterans to get home mortgage loans with good borrowing terms, usually with little or no down payment.

To be eligible for the VA loan, you must have served 180 active days service since September 1940. If you enlisted after September 7, 1980 you need to have two years of service. You do need to get a certificate of eligibility from the Department of Veterans affairs as proof of service.

Veterans are not permitted to pay points to the mortgage lender on these types of mortgage loans. You can prepay a VA loan without penalty and the residential loan is assumable, meaning the property buyer can take over the mortgage if the property is sold. This feature can save a buyer significant amounts of money in mortgage interest payments. The buyer still needs to meet the requirements of the current mortgage banker. The homebuyer takes over payment on the existing mortgage and pays the difference between the mortgage balance and the selling price. You should always verify first whether the mortgage home loan you are securing is assumable.

Balloon mortgage loans

These loans often have interest-only payments. In this case, you don’t amortize any loan principal and the entire loan amount is due at the end of the loan term. A balloon mortgage allows you to minimize your monthly payments until you refinance the loan. Another advantage is that a larger share of your payment may be eligible for the mortgage interest tax deduction .

Convertible mortgage loans

These are ARM loans that allow you to convert to a fixed-rate loan at or before a specified time. The conversion privilege lets you start off with a low variable rate, then lock in when fixed rates drop low enough.

Reverse Mortgage

A reverse mortgage is a unique loan that enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment.

The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.

Eligible property types include single-family homes, manufactured homes built after June 1976, qualified condominiums, and townhouses.

Enhancing your retirement years
The funds from a reverse mortgage can be used for anything: daily living expenses; home repairs or modifications; health care expenses, including prescription drugs or in-home care; pay-off of existing debts; lifestyle enhancement; prevention of foreclosure; and other needs.

There are no income or medical requirements to qualify. You may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage.

You can choose how to receive the money from a reverse mortgage. The options are: all at once (lump sum); fixed monthly payments (for up to life); a line of credit; or a combination of these. The most popular option – chosen by more than 60 percent of borrowers – is the line of credit, which allows you to draw on the loan proceeds at any time.

The amount of money you get from a reverse mortgage depends on several factors, including: your age, type of reverse mortgage selected, appraised home value, current interest rates, and – sometimes – where you live. In general, the older you are and the more valuable your home (and the less you owe on your home), the more money you get.

The funds from a reverse mortgage are tax-free; it’s your money, not additional income. A reverse mortgage does not affect regular Social Security or Medicare benefits. To assess the impact, if any, on other federal or state assistance or medical programs, you may wish to consult with your local Area Agency on Aging , 800-677-1116, a reverse mortgage lender , or a tax attorney.

Before applying for a reverse mortgage, you must first meet with a counselor. A list of approved counseling agencies nationwide is posted online by the U.S. Department of Housing and Urban Development. Or, you can schedule a counseling session with an AARP-approved telephone counselor , 1-800-209-8085.

The counselor’s job is to educate you about reverse mortgages, to inform you of other alternative options available to you given your situation, and to assist you in determining which particular reverse mortgage product best fits your needs.

No monthly payments are due on a reverse mortgage while it is outstanding. The loan is repaid when you cease to occupy your home as a principal residence, whether you (the last remaining spouse, in cases of couples) pass away, sell the home, or permanently move out.

The amount owed can never exceed the value of your home. Furthermore, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.