Loan Program Descriptions
All of the following loan programs do NOT contain any
-- This is the most popular loan by far. The loan amortizes over 30 years.
While your total principal ("P") & interest
("I") components of your payment will never change until the loan is
paid off, the proportion of P & I will change with each and every payment.
For instance, on payment #1, ~ 99% of the P&I constitutes interest, and on
payment #360 (if you ever get there) ~ 99% of the P&I constitutes
-- This type of loan is recommended if you plan to sell the
property 12 + years, or you believe there exists an increasing or neutral
interest rate environment.
You can opt to have this type of loan amortize on a 25-year
or 20-year basis. The pricing has been very similar to that associated with
the 30-year fixed. Because the price incentive is small or insignificant,
you can easily accomplish the same objective (paying off your loan earlier)
through regular prepayments. Be sure to ask about
the current pricing "spread."
New Fanniemae HomeReady Program
-- This is the same type of loan as the 30-year fixed, except the amortization
period is based upon 15 years/180 months. Because of this shortened
time-frame, your monthly P&I payment is usually ~ 30% higher than that on
a 30-year fixed rate loan. The interest rate is usually 0.25% to 0.50% lower
than the 30-year fixed, which is a significant price incentive.
-- This type of loan is popular for those interested in refinancing
and those whose primary objective is to payoff the loan as soon as possible,
thus saving a boat load of interest over the life of the loan. For purchasers,
this type of loan is recommended if you are planning to own the property 12+
years, and you feel comfortable handling the ~ 25-30% higher payment.
- 7/23 year extendable
balloon (a.k.a. 7/23 two-step) -- This loan
program amortizes over a 30 year period. The interest rate and payment are
fixed for 7 years. At the end of year 7 (assuming you still own the property),
the interest rate will be "re-set," the payment adjusted for the
remaining term of 23 years, and those set of circumstances will not be subject
to further adjustment over the remaining term. The interest rate will be reset
at 0.50% above ~ the market 30-year fixed loan price, associated with 0 points
at that time. This 23 year "extension"is predicated upon
the following conditions which are required to be corroborated at the end
of year 7.
- You must still be the owner and OCCUPANT of the property
- There must be no "junior" liens against the
property, such as a home equity loan/line.
- In the preceding 12 months, you did not make a 30+ day
late payment on the mortgage
- The reset interest rate cannot be more than 5.0% above
your start rate.
If any of these conditions are not satisfied at the end of
year 7, the loan "balloons." You must payoff the loan. Of course,
you can always refinance.
-- This type of loan is recommended if you feel you will own
the property 4-7 years.
5/25 year extendable balloon
(a.k.a. 5/25 two-step) -- This type of loan has the same terms &
conditions as the 7/23, except the "re-set" occurs at the end of
year 5, and the adjustment remains in effect for 25 years. There is usually a
~ 0.125% price incentive versus the 7/23.
-- This type of loan is recommended if you feel rather
confident in owning the property 3-5 years.
10/1 year ARM
-- This loan program is very popular right now. The loan amortizes on a
30-year basis, and for the initial 10 years the rate and P&I payment are
fixed. At the end of year 10, the interest rate will adjust to the lower of
"index + margin" or "caps" (assuming interest rates have
gone up). Call our office for the current index, margin, and caps -- these
are subject to change on a daily basis. Once the rate & payment have
been adjusted, that condition will remain in effect for 1 year. The rate &
payment will adjust every year thereafter until the mortgage is paid off.
There is usually a significant 0.375% to 0.625% interest rate incentive versus
the 30-year fixed price.
-- This loan program is recommended if you feel that you
will own the property for 6-12 years.
7/1, 5/1, & 3/1
year ARMs -- These loan programs work exactly
as described by the 10/1 ARM, except the first adjustment comes at the end of
7, 5, or 3 years. The 7/1 ARM is priced ~ 0.125% below the 10/1 ARM, the 5/1
ARM is priced ~ 0.125% below the 7/1 ARM, the 3/1 ARM is priced ~ 0.125% below
the 5/1 ARM.
-- These loan programs are recommended if you feel that you
will own the property before the initial adjustment takes place. These loans
are popular with relocation clients and with clients who believe interest
rates will be declining in the future.
1 year ARM
-- This loan program offers one of the lowest initial interest rates on the
market. It is also one of the riskiest due to the fact that the interest rate,
and thus the payment, adjusts each and every year until the loan is paid off.
Just as with the other adjustable rate mortgages listed above, the adjusted
rate is subject to an "index + margin" and "caps," so
there are protections as to the maximum interest rate and payment.
-- This loan is recommended in very particular circumstances
such as a very temporary relocation client, a client who feels interest rates
are going to be dramatically reduced, or investor purchasers who have some
sort of cash-flow motivation.
Feel free to call our office for a more
in-depth discussion about the various
loan programs or other loan programs you may have seen or heard about.
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