Loan Programs

There are a wide variety of loan programs on the market. Each loan program has its own advantages and disadvantages. They vary in everything from the interest rate defining the monthly payment to the term of the loan. It is smart and recommended you consult a trusted advisor with the proper mortgage planning background before making the decision on your mortgage.

Some questions to consider before committing to a loan program:

1. How long do you plan on living in the home?
2. Are your plans to pay the home off to a zero balance or leverage it with a high mortgage balance?
3. At what age do you plan on reaching retirement?
4. Are you on pace and the path to do so?
5. What are the current assets that will aide and facilitate your retirement?
6. What are your biggest financial insecurities?
7. How often do you refinance? And are you planning on refinancing in the near future?
8. Do you have any other financial priorities in your life that need to be funded, such as a retirement account or a college fund for your children?
9. Are you maximizing your mortgage for tax incentives?
10. What other real estate investments do you currently hold, such as rental properties, income properties, or any vacation or secondary homes?

These are merely a few questions you may want to consider with a mortgage planning expert in order to maximize your current finances, and also produce a path leading to your financial vision.

Common Loan Programs:

Fixed-rate Mortgage

The fixed-rate mortgage has long been a popular mortgage program. With an interest rate that never changes, it provides stable, predictable, and consistent payments every single month. If market interest rates go down, however, your interest does not go down with them. Equally, if market interest rates go up, you will have the comfort in knowing your rate will not go up.

If you plan on staying in your home AND your mortgage for longer than 7 years, a fixed-rate mortgage may be the program for you. However, if you plan on moving, selling, or refinancing in the coming years, you may want to look at alternative programs, since fixed-rate mortgages usually have a slightly interest rate and higher payment than other alternative programs.

Adjustable-rate Mortgage (ARM)

An adjustable-rate mortgage has a lower initial interest rate, so your payments will almost always be lower with an ARM than they would be with a fixed-rate mortgage. The interest rate on an adjustable-rate mortgage starts at a lower rate than adjusts based on the market index it is tied to. The starting rate may be fixed anywhere from 3 months to 10 years, depending on the mortgage product selected. There is also a lifetime cap on adjustable-rate mortgages, to ensure the interest rate will not exceed a certain level.

With adjustable-rate mortgages, you can often borrow more since the payment is lower. Adjustable-rate mortgages are recommended if you plan on moving, selling, or refinancing in less than 7 years. Also, an adjustable-rate mortgage is sometimes a better choice if you are buying or refinancing in a time when rates are high.

Balloon Mortgage

Similar to an adjustable-rate mortgage, a balloon mortgage has a lower interest rate and payment than does a fixed-rate mortgage. A balloon mortgage can subsequently help you either borrow more money (i.e. have a larger loan), or it can help you save money on your monthly payments.

Typically, a balloon mortgage has a fixed term for 5 or 7 years. A final balloon payment for the remaining balance is due at the end of this fixed term.

A balloon mortgage may be a sound decision if you plan on staying in the home and mortgage for 5 to 7 years. It is also important to have money to either pay the balloon payment or be ready to refinance into another mortgage.

Second Mortgage

As you pay down your mortgage and your home’s value appreciates, you build equity. As a result, you may decide to tap into that equity. You can do so with a second mortgage. A second mortgage can be fixed for the term of the loan and can give you predictable payments, as well as the cash you want upfront in one lump sum.

Home Equity Line of Credit (HELOC)

As you pay down your mortgage and build equity, you may want to tap into it sporadically from time to time. You may not want a lump sum of cash, so a second mortgage may not be the best choice. An alternative choice is a Home Equity Line of Credit, or a HELOC. A HELOC is similar to a credit card with an available limit you can draw against, like a credit card.

If you want the comfort of emergency access to money, then a HELOC may be a good decision. Be careful though, because HELOCs have variable rates and can adjust according to the market fluctuations.

Interest-rate Buy-down Mortgage

The most common interest-rate buy-down is the 2-1 buy-down. In the past, for a borrower to secure a 2-1 buy down, he or she would pay 3 points above current market points in order to pay a below market interest rate during the first two years of the loan. At the end of the two years, the borrower would then pay the old market rate for the remaining term.

This type of program allows you to have an interest rate far below the market availability. However, be aware that this is a costly option and adds a lot of upfront charges which are financed through the life of the loan. With the help of a trusted advisor, make sure the savings per month will outweigh the costs of the loan at a future date.

Interest-only Mortgage

Interest-only mortgages have increasingly become popular. These types of loans are often fixed for the initial term of the loan—anywhere from 2 years up to 30 years. If you want to ease yourself into a mortgage with lower payments, and do not want to necessarily pay down the mortgage balance, an interest-only mortgage may make sense.

The interest rate for an Interest-only mortgage is often lower than a Principle-and-Interest mortgage. And since you are only paying the interest portion of the payment, your overall saving per month will be more. By making additional payments, you can still pay down the principle balance while having the freedom of paying only interest per month.

If you are not planning on paying the home off and bringing your mortgage balance to zero, an Interest-only mortgage may make sense.

Payment-option ARMs

Payment-option ARMs are very dynamic and complex programs. You need the proper education of both the advantages and disadvantages prior to choosing this type of loan.

Payment-option ARMs traditionally have four (4) different payment options each month. So you can choose a payment ranging from the very minimum interest due, to full interest due, to principle and interest due on a 30 year scale, and also principle and interest due on a 15 year scale.

The payment you choose to pay each month will either increase your principle balance, decrease your principle balance, or keep it untouched from the previous month.

Payment-option ARMs do just that: give you payment options. However, you can also increase your principal balance as you defer interest every month you pay less than the full interest due.

Some advantages of this program lay within the fact that you have payment flexibility. You have a range of payments and can allocate however much towards your mortgage every month. Some utilize the Payment-option ARM for investment properties, in order to obtain cash flow. Some utilize the Payment-Option ARM and allocate more money into interest-gaining accounts, such as mutual funds or an IRA.

Some disadvantages, however, are that your principal balance can grow and payment recast or adjustment. Deferring interest means that it will need paid off at some point. Either you will pay it off by choice, or the lender will often recast your mortgage so you pay down the balance, by taking away the option to make the minimum payment.

FHA Mortgage

FHA mortgages are insured by the Federal Housing Administration. FHA mortgages make home financing possible for those who may not quality for conventional mortgage financing. It is important to note FHA mortgages are not government loans; they are simply insured by the Federal Housing Administration.  These mortgages are originated and funded by typical mortgage companies.  However, they are simply insured by the FHA should a default occur in the time period after the loan is funded.

FHA mortgages offer greater flexibility with underwriting, taking into account different income levels and credit types. They also offer low down payment and closing costs alternatives. In general, the guidelines for FHA mortgages are more liberal and allow a wider range of income, credit, and overall financial parameters.

It is also important to note that FHA mortgages are full documentation loans, that take into account all income, assets, employment, and adverse marks in credit.  FHA mortgages do not offer stated income options.

VA Mortgage

VA mortgages, similar to FHA mortgages, are insured by the Department of Veteran Affairs. VA mortgages make financing easier and simpler for those who are veterans, active-duty members, and also reservists.

VA mortgages offer greater flexibility with underwriting and also take into account a wider spectrum of guidelines regarding income, credit, and overall financial parameters.

Again, it is vital you always consult a trusted advisor for the proper mortgage planning and product selection. At Freedom Lending we will educate, guide, and steer you in the right and most proper direction for your financial needs and wants.